MODULE 2

UNDERSTANDING THE
EXTERNAL
ENVIRONMENT
LEARNING OBJECTIVES

After completing this module, you should be able to:

2.1 select the key concepts, factors and frameworks that relate to understanding the influence of the external
environment on organisational strategy
2.2 evaluate the key factors related to external environment that impact growth, profitability and competition
2.3 appraise how the roles of management and leadership drive the organisational strategy in relation to the
external environment.

ASSUMED KNOWLEDGE

It is assumed that, before commencing your study in this module, you are able to:
• explain strategic management
• explain the principles of governance and ethics
• describe the key tasks of financial accounting
• describe the overall strategic process, the contemporary business context and the role of leadership
in strategy.

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PREVIEW
In module 1, we identified the stages of the process used in the rational approach to strategy. These stages
were explained in figure 1.4 and are shown again in figure 2.1.

FIGURE 2.1 Strategy process: analysis of the internal environment

Global strategy and leadership

(Module 1)

Strategic analysis:
external environment
(Module 2) Exploring Developing Implementation
options strategy and monitoring
Strategic analysis: (Module 4) (Module 5) (Module 6)
internal environment
(Module 3)

Emerging business models

(Module 7)

Strategic analysis: Where are we now?

• Data collection
• Remote environment analysis
• Industry analysis
• Market analysis
• Competitive analysis

We will systematically work through the strategy process stages in modules 2–6, beginning with the
strategic analysis stage. Conventionally, a strategic analysis is undertaken annually with data captured
and collected on a more regular cycle to be used in decision making. It is important to recognise that
while strategic analysis is a discrete stage of the strategy model, the internal and external environments are
constantly monitored to ensure the organisation is aware of and can respond to changes. This has become
increasingly important and possible due to the increasing pace of change and complexity of the business
environment and advances in the ability to collect and analyse data grown.
We can separate strategic analysis into two main parts: analysis of those aspects outside or external to the
organisation, and those areas within the organisation or the internal environment. The focus in this module
is on understanding the external environment; module 3 considers the internal resources and capabilities
of the organisation.
To enable organisational leaders and managers to develop a strategy and direction for an organisation,
an analysis of external and internal influences is required to determine their effects on the organisation’s
performance. Each category of external and internal influences is illustrated in figure 2.2 (referred to as
‘the framework’), including the outputs of the organisation — the product or service that proceeds through
a range of distribution channels to the end customer.
This module provides concepts and frameworks for strategic analysis of the external operating envi-
ronment of an organisation, including an exploration of how information technology can support this
analysis. The main tools we consider are STEEPLE analysis, Porter’s five forces analysis, and competitive
positioning, which are shown in figure 2.2. The major topics covered are:
• defining an industry
• evaluating an industry’s attractiveness using tools such as STEEPLE to assess growth, Porter’s five
forces analysis to assess profitability, and the competitive environment to assess the competitive
landscape of the industry
• considering the key issues that might affect the industry’s growth, profitability, competitiveness and
sustainability
• analysing the data, gathering insights and integrating the expected effects these complex issues may have
on the organisation’s strategy, since many issues are qualitative and subjective, rather than quantitative
and objective.
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70 Global Strategy and Leadership

 FIGURE 2.2 Framework for strategy analysis

External business drivers

Political, regulatory and legal environment, market characteristics, competition, substitutes, demand
for services, increasing complexity, technological changes and advances,
environmental factors, stakeholder expectations

EXTERNAL INFLUENCES

INTERNAL INFLUENCES

Operational drivers Strategic drivers

Markets/ Stakeholders
Industries
Products/ Channels Customers
STEEPLE Internal and Services
SWOT
external BCG matrix
Porter’s
five forces

Competitive People and organisational

positioning drivers
matrix

Source: KPMG and CPA Australia 2020.

The first challenge in undertaking strategic analysis is to define the scope of the external environment
and industry to be analysed. This challenge extends to finding or sourcing meaningful data for analysis
and considering its meaning and influence on the organisation. This data analysis informs the organisation
effectively and efficiently about its current position and helps shape decisions about where it wants to be
in the future.
The external environment includes the specific industry the organisation competes within, its competi-
tive position within this industry, as well as the broader macro-environment (i.e. the remote environment).
It is important to understand that an external factor (e.g. changing foreign exchange rates) that has a
negative effect on one industry may have a positive effect on another industry due to the nature of the
organisations within that industry. It is also important to recognise the potential for an environmental
factor (usually technology based) that has such a profound impact on the industry landscape that it creates a
‘disruption’. Disruptions change the market and value network within an industry, and have the potential to
displace existing players (no matter their size and influence). Understanding both the remote and industry
environments helps clarify what drives growth and profitability in the industry, identify how competitors
are acting and create awareness of disruptive technologies. This analysis informs what an organisation
needs to have in place to be competitive and successful in this operating context now and in the future.
The organisation can then develop its strategic plan in the context of what is happening around it.
Leaders and managers take an active role in the structure, development and implementation of the
external analysis in order to optimise its relevance to the organisation by:
• providing insights into the type of forces that are most relevant to the industry and therefore should
be assessed
• providing resources to enable the collection and analysis of relevant data
• being open to new ideas and initiatives derived from this analysis
• being prepared to make difficult strategic decisions to support these.

2.1 UNDERSTANDING THE EXTERNAL

ENVIRONMENT
It is important to differentiate between industry, market and the external environment of an organisation.
Often these terms are used interchangeably; however, in this module, they broadly refer to the following.
• Industry is the grouping of similar economic or commercial activities. For example, the clothing retail
industry is made up of all organisations that manufacture and/or distribute clothing.
• Market is the grouping of all organisations and their buyers. So the retail clothing market consists of the
providers, listed above, and the consumers of these products.
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MODULE 2 Understanding the External Environment 71

• External environment refers to factors external to the organisation that influence the organisation’s
strategy, including but not limited to: industries and markets, societal issues, technological changes,
economic drivers, environmental issues, political forces, laws, ethical considerations and a variety of
other factors.
In an analysis of the external environment, we are interested in identifying factors that will have led the
industry to its current state and that are expected to affect its future growth and profitability. This analysis
is an important foundation in strategy development, as the environment provides the context within which
the organisation operates and competes. From this analysis it is then possible to define key success factors
for the industry, which form the basis for understanding an organisation’s competitive position.
By starting with the external environment in strategy analysis, leaders and managers are forced to look
outside their organisation and consider issues that are not normally part of their day-to-day world. This
results in a more critical analysis of the organisation in terms of how its strategy, stakeholders, capabilities
and performance fit in the context of the external environment and how this fit may need to change and
evolve over time.
The analysis of the external environment is considered a difficult component of strategic analysis for
the reasons listed below. Focusing on the corresponding questions may help you to navigate these.
1. Difficulties in framing the scope of analysis, including industry and market definition due to the breadth
of the analysis required — what information do we need?
2. Difficulties in sourcing reliable data to analyse — where do we find this information?
3. Uncertain and ambiguous signals produced by the environment make interpretation difficult — what
does it mean?
4. Focusing on the past may not help predict the future — what has changed?
5. Factors that have shaped the industry’s growth, profitability or competitiveness to date will not
necessarily have the same impact on the industry’s future state — what is the impact of the change?
6. Many of the factors in external environment analysis are outside the control of the organisation and
difficult to predict — what can we do to protect our organisation from external forces?
7. Often disruptive factors and technologies are not anticipated by organisations and thus their impact is
not assessed and planned for and the organisation is caught off guard — is our competitive position
sustainable in the long term?
While leaders and managers can help frame the scope of external analysis based on their expertise and
experience, they need to resist falling into the trap of believing that they already know all there is to know.
Instead, they need to be open to the potential opportunities and threats that may be uncovered by the
external analysis and be prepared to act on them, through strategic decisions that secure the organisation’s
future growth and profitability.

THE ROLE OF THE CPA IN ANALYSIS

Data analysis, business intelligence, and ultimately advice and decision making, are at the core of analysis.
It follows then that finance professionals such as CPAs are deeply involved in many aspects of the
strategic analysis process. This involves both conventional financial and management accounting roles and
increasingly responsibilities related to issues such as measuring social and environmental performance and
shaping the organisation’s approach to data analytics.
An essential part of the external environment assessment process is the analysis of financial and
economic influences on the organisation and its operations. Engaging finance professionals (such as a
CPA) to capture, collect and analyse the contribution of data to decision making improves the value and
appropriateness of the analysis of that data for rigorous decisions. The STEEPLE, Porter’s and competitive
assessments include key areas of analysis and the CPA regularly contributes to analysis of this type. The
CPA is also qualified to offer judgement on analysis of industry sectors and the influence of economic
drivers such as currency fluctuations and legislative changes such as taxation and superannuation rules
may have on sectors and organisations.
External analysis of market uncertainties and impact on risk, financial regulatory compliance, and
economic impact is vital in ascertaining and forecasting for the future market landscape and understanding
the causes and effects of those risks. Many functional areas and business units need to manage the level of
tax liability undertaken in conducting business and understand that mitigating risk will improve a firm’s
financial position and the converse is also true. Industry initiatives, acquisitions and new product development
projects must be analysed while considering the financial implications and influence on the competitive
environment, while monitoring competitor activities. The CPA is the most knowledgeable member of the
planning team to conduct this assessment and advise at both an industry and organisational level.
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72 Global Strategy and Leadership

 Financial metrics have long been the standard for assessing an organisation, market and industry
performance. These traditional financial metrics report on the information recorded and processed in
accounting or tax accounting systems in order to translate these into growth and profitability — ‘the
language of money’ (Nikolaevich, Yurievna, Vladimirovich & Agüero 2019) — and are focused on the
needs of shareholders. The CPA must be familiar with these metrics, the data that informs them, where to
find this data and how to assess and measure performance against financial goals and metrics.
In modern organisations, it is no longer reasonable to only consider shareholders in strategic decisions
and reporting. More recent expectations require a broader approach where accounting information covers
any information flows and data to all relevant stakeholders. Stakeholders are both internal (shareholders,
employees) and external (customers, suppliers, community groups). Stakeholder analysis (discussed in
module 3) assesses the relationship of the various stakeholders to the organisation, their relative position,
their attitudes and expectations and how these may impact on profitability, performance and strategy.
This approach integrates financial information with the information on the environment, society and
governance and shapes the type of data that is gathered and how it is used. For example, many stakeholders
are placing more importance on corporate social responsibility and sustainable practices. As a result,
CPAs may need to report on emissions targets and offsets and even the payment of suppliers, etc.
Other activities that may be reported on include resource conservation, environmental activities and
initiatives, occupational health and safety, community relationships and the overall economic impact of the
organisation. To adopt this approach, CPAs need to understand their stakeholders and their expectations
and adapt their practices accordingly.
These sustainability accounting and reporting practices identify and interlink the social, environmental
and economic costs and benefits of an organisation’s strategies and actions and embeds them into future
strategic decision making.

EXTERNAL ENVIRONMENT ANALYSIS — ANALYSING

AN INDUSTRY
An industry analysis process considers factors that affect both the growth and profitability of an industry,
which in turn will affect an industry’s level of competition.
The process includes an understanding of:
• the definition of the ‘industry’ to be analysed, its value chain and its various segments the life cycle
stage of the industry
• how the industry has evolved to its current state, and the key factors that have driven historical growth
and profitability
• how the factors may change, and their impact on future growth and profitability
• what drives customer demand for the products and services offered by the industry the industry key
success factors and how competitors in the industry compete
• any technological innovations that may create a significant disruption in the industry.
A thorough analysis of these steps should enable us to draw conclusions about the relative position of an
organisation in the context of current competitive factors in the external operating environment and how
well placed it is to remain competitive in the future.
Gathering Data for Industry External Environment Analysis
We have already determined that some of the biggest issues in conducting an external analysis are
as follows.
1. Difficulties in framing the scope of analysis, including industry and market definition due to the breadth
of the analysis required — what information do we need?
2. Difficulties in sourcing reliable data to analyse — where do we find this information?
Sustainable reporting practices have changed the scope of the information that needs to be collected, with
environmental, social and governance issues playing an increasingly important role in strategic decisions.
These factors also require new approaches to gathering information. When integrated into decision making,
this is referred to as business intelligence (BI).
There is now, more than ever, a vast amount of data available for organisations to consider. Technology
means that more data is available to more people more often. Although this offers obvious advantages in
external environmental analysis, it is not without risk. It is more important than ever to have a structured
approach to BI. Clearly understanding what information, your organisation needs is essential to avoid
an information overload and the potentially greater danger of ‘boiling the ocean’, where you are so
overwhelmed by data, that rather than being enhanced, decision making is actually stifled.
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MODULE 2 Understanding the External Environment 73

 Once the organisation has decided what information is needed, the next step is to decide where to
find that information. Is it relevant, reliable and viable? Data comes in various different forms, including
quantitative and qualitative, structured and unstructured. Recent technological advances have allowed for
unprecedented combinations of these types of data.
Big data is an all-encompassing term for the volume, velocity and variety of data that is now available.
The majority of this data comes from three sources: social data — for example, likes, comments, and
shares; machine data — for example, scanners, logs and tracking; and transactional data — for example,
invoices and receipts. Big data is expected to rise exponentially with the growth of artificial intelligence
and the Internet of Things. The nature and scale of big data means that it requires considerable resources
and particular skill sets to make sense of it and gain the insights necessary for strategic decision making.
As many organisations do not have these capabilities in-house, the collection and reporting of this type of
data is often outsourced, creating a new expense.
Big data analytics are technologies that have been developed to help organisations make sense of this
vast amount of information. These services can be used to flag risks, benchmark an organisations’ activities
relative to their competitors, monitor any reference to the organisation and analyse best practices. Consider
social media analytics. The key benefit of obtaining search and social media data is that it is often a forward or
leading indicator of customer behaviour and patterns. Issues or opportunities that analysts or organisations
would previously have taken months to observe can now be identified much earlier. A powerful example
is the ability of health departments to identify potential disease outbreaks earlier by tracking searches for
particular symptoms rather than waiting for collated data from hospitals, which could take weeks or even
months to report. This early knowledge can lead to substantial savings in healthcare management.
Analytics can also be used in a materiality assessment to identify the most relevant issues for their
sustainability strategies. Traditionally, stakeholders would be approached by a member or agent for the
organisation to gauge their expectations. This is a resource and time-consuming exercise. Analytics such
as datamaran can be used to review multiple sources such as company report, news and social media
sites that act as proxies for stakeholder groups. It tracks the amount of space given to each topic and
the context in which it is mentioned. It can then offer insights into concerns in the industry or market,
competitor or supply chain issues, changes in the regulatory environment and stakeholder attitudes and
behaviours offering a more comprehensive and large-scale materiality assessment than can be done through
traditional methods.
The risk to the organisation is choosing the best and most relevant analytics for their situation. In order
to ensure best ‘bang for your buck’, it is more important than ever for the leaders and managers to be clear
on what information they need and why.
Developing a BI methodology should not be an ad-hoc exercise. Instead, organisations should adopt a
structured approach, which combines internal data collection, storage and collation and the procurement
of external research from subscription-based services that provide collated statistics, share-analyst pre-
dictions, industry reports, online analytics and third-party data management services. The following list
includes some sources for gathering information about an industry and the external environment in which
it operates.
• Public agency and statutory authority reports from organisations that are rigorous in publishing
accurate data. Statistics produced by government departments are a reliable source of information. Two
Australian examples are the Productivity Commission and the Australian Bureau of Statistics (ABS).
• Commercial research from private research companies, such as IBISWorld, that collate a large amount
of publicly available information and combine it with their own analysis to prepare succinct summaries
of specific industries and companies.
• Reports of trending topics and purchased data and analysis of social media discussions from external
providers.
• Many industry associations collect statistics and monitor project trends, although some of this infor-
mation is available to members only. Market research firms investigate sociocultural attitudes, both
specifically and generally. While much of this information may be a couple of years old, this is generally
not a problem as the analysis focuses on understanding trends.
• Public company annual reports, analyst presentations and initial public offering (IPO) documents can
prove a valuable source of information on an industry and the forces affecting it. In particular, IPO
documents provide a good summary of what factors the company’s directors believe will affect growth
and profitability in the future as these forms the basis of the company’s forecast financials.
• Lobbying organisations monitor political trends and the specifics of planned legislation.
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74 Global Strategy and Leadership

• Universities are repositories of research information and employ researchers who are looking for real-
life problems to address.
• Consultancy firms often issue industry updates in areas where they have consulting business. Up-to-date
and accurate industry information is also embedded in investor briefings that listed companies make to
the market.
With so many options, it is becoming more and more difficult for organisations to decide the most
relevant data to collect and the most viable sources. The smaller the organisation, the more likely it is to rely
on publicly available industry and market information. Larger businesses are more likely to commission
third parties and/or undertake their own research to ensure they have reliable and up-to-date information
for decision making, as quality industry information is a powerful investment in risk management. In either
situation, the organisation will often need to reformat or restructure data so that it can be manipulated and
analysed effectively. The organisation may also need to make some assumptions. In preparing analyses
of industries in Australia, similar markets can be observed. For example, the agricultural industry in New
Zealand could be considered a close proxy in many respects to the agricultural industry in Australia. Where
information on an industry is not available locally, it is acceptable to make intelligent assumptions — as
long as the assumptions are explicitly stated.
Strategic leaders and managers need to consider how their organisation will manage this increasingly
complex and dynamic information landscape. Many organisations today are taking a cross-functional
approach to this, with input from marketing, finance, legal, operations and other relevant functions as
to their data and reporting requirements. Organisations with strong technical capabilities can utilise these
in the procurement of data. New functions and industries have also evolved around data management and
are another option to be explored. Some organisations hire internal ‘data curators’, who are responsible for
matching data requests from throughout the business to the most relevant and reliable sources. Alternately,
a slew of third-party data and consulting services have emerged and can be contracted to help organisations
navigate the minefield of data available and optimise their BI systems. It is important to note that although
these third-party suppliers have capabilities and expertise in data management, and may even have some
industry insights, organisations need to work in partnership with these services, providing the input and
strategic direction which guides the data collection and presentation.
The success of organisational strategy depends heavily on the quality and utilisation of their environmen-
tal research. Organisations need a well-planned approach to data collection, storage and use in order to keep
up with changes in the broader economy, their specific industry and stakeholder behaviour. Developing
a quality BI system enables the organisation to answer the initial questions of, what information do we
need, and where do we find this information? Once collected, the data needs to be presented to clearly
show what has changed in the industry/environment and the impact of that change on the organisation. IT
is increasingly being used in gathering, collating and presenting the data, and understanding the availability
and use of these techniques is an essential role for the BI coordinator. The quality of the research presented
allows for true insights be gathered, and strategic decisions made on how to protect the organisation from
external forces (where possible) and ensure a sustainable competitive advantage.
Example 2.1 provides an overview of the fisheries industry and describes how advanced analytics can
be used to support the industry to make more informed decisions.

EXAMPLE 2.1

Advanced Analytics in the Fisheries Industry

The fisheries industry is significant to the economies of many countries. Ensuring that the industry remains
sustainable is essential to its long-term viability. There are a number of sectors that need to work together
in order to make this happen, each with competing motivations.
Demand for seafood has increased an average of 3.2% annually between 1961 and 2016 and is
predicted to increase by 20% from 2016 to 2030. This increase is driven by global population growth,
the expansion of the middle class and greater urbanisation (giving more people more access to seafood,
as well as the electricity and refrigeration needed to store it). On the other hand, consumption of terrestrial
mammals has risen by only 2.8%, representing a change in consumption patterns as more people are
choosing fish as a good alternative to red meat.
As demand continues to increase, fishing companies are putting unprecedented pressure on marine
environments and ecosystems. In order to manage reduced hauls in traditional fishing areas, fishing

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MODULE 2 Understanding the External Environment 75

 companies are expanding their footprint in the ocean as well as targeting new species. As a result, 90% of
the world’s oceans are now fished commercially and about half of the world’s fish populations are classified
as collapsed, rebuilding or overexploited (see figure 2.3). Balancing fishery interests with environmental
concerns is a continuous challenge. Advanced analytics (AA) may provide a solution to this problem by
using sophisticated methods to collect, process and interpret big data.

FIGURE 2.3 Nearly half the world’s fish stocks are overexploited, rebuilding or collapsed
Status of global wild-fish stock, %
100
Underexploited

75 Fully exploited

50
Overexploited
25
Rebuilding
Collapsed
0
1950 1960 1970 1980 1990 2000 2010

Source: McKinsey & Company.

Fishing is not the only threat to the sustainability of this industry. It is predicted that by 2025, there will
be 250 million metric tons of plastic in the ocean — one ton for every three tons of fish! Coupled with
this are the effects of climate change — acidification, warming and deoxygenation processes — which
will have a profound impact on all marine ecosystems. These are global issues with many stakeholders
involved in their management.
In response to these varying issues, some countries and regions have already taken action to improve
their fisheries management. For example, 69% of stocks managed by the Australian Fisheries Manage-
ment Authority were sustainably fished in 2015. However, these measures are negated by unsustainable
practices in other markets. However, regulation alone cannot eliminate overfishing and both national and
international collaboration is needed to ensure a sustainable industry. Technology has enabled data to
be collected and made available globally on issues such as catch reporting, trade-information sharing,
subsidies, tariff policies and regulation enforcement. Advanced analytics can then be used to manage this
data and make them meaningful to all stakeholders.
Figure 2.4 describes how both fisheries and seafood consumers can benefit from AA.

FIGURE 2.4 Potential use for AA in the fisheries industry

Advanced analytics is ... driving improvements ... and creating benefits

now more viable because of ... for fisheries with ... for seafood consumers with ...

• Increased data availability through • Better decision-making • Increased sustainability of the

sensors, satellite imagery, cameras, tools to achieve complex and world’s fish stocks, which will
drones, and other technologies sometimes conflicting goals, improve global food security and
• Better tools for deploying and such as profitability and maintain the economic and
communicating information, such as sustainability social benefits of fisheries
smartphones and the Internet of Things • New tools that address • More efficient monitoring,
biological variability, capture control, and surveillance
• Improved data-ingestion capabilities
uncertainty, and manage instruments, which will reduce
resulting from machine learning, artificial
revenue volatility and risks illegal fishing (as well as the
intelligence, better data storage,
poor labour conditions and
increased computational power, and • Better methods for reporting
human-rights abuses often
other technological advances to public authorities
found at companies that engage
in such practices)

Source: McKinsey & Company.

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76 Global Strategy and Leadership

 There have been a number of key developments relevant to fisheries which include:
1. sensing platforms via satellites, drones and onboard or underwater devices
2. improved data-transmission technologies
3. more insightful data analysis.
Data Acquisition Through Sensing Platforms
Sensors for collecting data have become more common, compact and cost effective in recent years and
the information gained from these have become freely available through a number of public agencies. The
types of sensors and their relevance to fisheries include the following.
• Satellite optical and radar sensors. Optical sensors measure sea temperature and turbidity, while radar
sensors measure ocean topography, winds, sea ice and the movement of vessels.
• Drones cover a smaller area than satellites, but provide more detailed images.
• Onboard or underwater devices record exhaustive and reliable data on vessel location, gear types and
catch, species, volume, biophysical characteristics and discards. Some authorities require large fishing
vessels to be equipped with these systems.
Improved Data-Transmission Technologies
Technology has enabled data collected from any of the above devices to be easily transmitted for analysis.
This data can now be collected in real time via wireless mobile networks and satellites.
More Insightful Data Analysis
More powerful software and tools have meant that more detailed information can be recorded in real time.
Also, the rise of artificial intelligence and machine learning has increased the scope and power of data
analysis, enabling the identification of hidden relationships in large amounts of data.
Advanced analytics are now being incorporated into all parts of the value chain with a variety of actions
being taken at each stage as seen in figure 2.5.

FIGURE 2.5 The adoption of analytics in fisheries requires a shift to data-informed, tech-enabled
processes

Key operational process

From To

Fisheries Data-scarce vision of fisheries based A data-rich environment that provides

management on landed catches and observer data more reliable assessments

Static management with yearly stock Dynamic management in which fishing

assessment stock is continually assessed

Detection and Detection driven by intuition, Detection supported by high-

capture experience, and short-range or resolution models and daily forecasts
immediate observations over the entire fishing territory

Navigation according to experience Internet of Things sensors that monitor

navigation parameters, helping to
define the most optimal routes and
energy-efficient navigation strategies

Low visibility on net contents Automatic and continuous detection of

catch parameters, such as fish size

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MODULE 2 Understanding the External Environment 77

 Processing Manual catch sorting Automatic scanning and control of
seafood-product quality through
cameras and intelligent sorting
systems

Reporting Recording of captured species and Reporting assisted by onboard camera

their biological parameters and artificial-intelligence recognition
via logbooks software

Surveillance and Surveillance based on partial and Real-time vision of fishing activities
control uncertain information about that assist with the design of efficient
fishing activities surveillance plans

Lack of transparency because of the Decentralised and reliable information-

multiple stakeholders involved management systems requiring little
human intervention

Few certification bodies to guarantee New sources of data that identify

sustainability and conduct regular violations in almost real time
reassessments

Source: McKinsey & Company.

The data being collected above can then be used to address a number of issues in the industry:
1. monitoring illegal, unreported and unregulated fishing
2. improving the detection of fish
3. reporting to authorities and management
4. enabling traceability.
Monitoring Illegal, Unreported, and Unregulated Fishing
AA can identify a fishing vessel’s activities and location to show whether they are in a restricted zone and
whether they are actively engaged in fishing or carrying out other (potentially illegal) activities.
Improving the Detection of Fish
AA provide a more dynamic, reliable view of the ocean environment including fish aggregation and
migration, temperature change, wave height, sea ice and other ocean conditions. This information coupled
with vessel location and catch can help determine the distribution and migratory patterns of target species
to aid in resource management and improve overall efficiency.
Reporting to Authorities and Management
AA automates the process of monitoring and reporting fishing activities. This is not only more time efficient
but also leads to more exhaustive and reliable data.
Traceability
Transparency and traceability are becoming more and more important in all industries as consumers
choose to be more informed about all aspects of the items and companies they are involved with. The
fisheries industry has traditionally struggled in this area as many stakeholders have a culture of closely
guarding their information, leading to corruption within the industry. AA and similar technologies can be
used to track seafood all along the supply chain, allowing for unprecedented transparency and labelling
that will help consumers make a more informed decision about their seafood purchase.
These actions show how AA are being used in the fisheries industry. However, many stakeholders are
still not using them to their full advantage. The greater affordability of the technology and availability of
the data collected means that all stakeholders have the ability to either implement or use AA to improve
their own operations and improve the efficiency and sustainability of the entire industry.
Source: Exhibits from ‘Precision fisheries: Navigating a sea of troubles with advanced analytics’, December 2019, McKinsey
& Company, www.mckinsey.com. Copyright © 2020 McKinsey & Company. All rights reserved. Reprinted by permission.

QUESTION 2.1

Consider example 2.1. Evaluate and explain the value of analytics to improve performance and
sustainability outcomes for the following stakeholders in the fisheries industry:
1. fishing companies
2. government agencies
3. food companies.
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78 Global Strategy and Leadership

 The key points covered in section 2.1 of this module, and the learning objectives they align to, are
as follows.

KEY POINTS

2.1 Select the key concepts, factors and frameworks that relate to understanding the influence of
the external environment on organisational strategy.
• The external environment refers to factors external to the organisation that influence the organisa-
tion’s strategy, including industries and markets, societal issues, technological changes, economic
drivers, environmental issues, political forces, laws, ethical considerations and other factors.
• The external environment is the context in which the organisation operates and competes.
• Industry analysis seeks to identify factors that have led to the industry’s current state and that will
affect its future growth and profitability. This enables key success factors to be identified and thus
informs the organisation’s strategic options.
• Analysis of the external environment increasingly involves large volumes of unstructured data.
Organisations require a structured approach to using this data to ensure decision making
is enhanced.
• Advanced analytics enable the use of big data to better inform decisions.
2.3 Appraise how the roles of management and leadership drive the organisational strategy in
relation to the external environment.
• Leaders and managers use their experience and expertise to frame the scope of the external
analysis, but must be open to recognising and responding to unexpected opportunities and threats.
• CPAs play an important role in analysis of the external environment and the provision of information
and advice that informs the development of strategy.
• Leaders and managers must clearly communicate what information they need and how it will
be used.

2.2 DEFINING THE INDUSTRY FOR ANALYSIS

It is important that any strategic analysis begins by defining the industry in which the organisation operates.
However, a key practical problem that often occurs in strategic analysis is that the people involved fail to
agree on a definition of the industry within which their organisation operates and that they wish to analyse.
Another problem is the omission of industry analysis entirely and focusing only on the organisation itself.
In addition, an industry is sometimes defined by the purely practical factor of ease of access to quality and
reliable data on which to base the analysis.
We define ‘industry’ as a group of organisations or business units participating in similar economic
or commercial activities, producing similar products or services. When thinking about industry from the
viewpoint of a specific organisation, the definition of ‘industry’ should also include a geographic element
(e.g. Australia, Asia–Pacific, Canada). This leads to tighter scoping of the analysis and clearer thinking
about the organisation’s real competitors. An organisation like Guzman y Gomez, which operates Mexican-
style fast-food restaurants, operated entirely in Australia for its first seven years. During that time it would
confine its industry to take-away food in Australia. However, once Guzman y Gomez decided to target
international expansion into other geographic markets, an analysis of the fast-food industry in the potential
market was required in order to understand the industry in that country, its competitors, and so on. Hence,
the company expanded its industry analysis to Singapore, then a couple of years later to Japan and recently
to the United States.
The concept of ‘industry’ is actually defined by the firm in the competitive market the firm sees itself
operating in. For instance, a global computer software supplier might define itself as being in the ‘global
software’ industry. A specialist software company supplying retail management systems in Australia
might define itself as being in the ‘Australian retail computer software manufacturing’ industry. These
organisations might compete with each other on occasion (such as in Australian retail software marketing),
but each has quite a different view of the ‘industry’ in which it operates.
These differing wide and narrow definitions are both very reasonable views about industries. A narrow
definition may make analysis more manageable, but a definition that is too narrow may exclude relevant
products or services, geographic regions, substitutes or disruptive influences. A wide definition of the
industry can help avoid these issues, but will make analysis more time-consuming and difficult. These
wide and narrow views are illustrated in figure 2.6.
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 FIGURE 2.6 An example of the wide and narrow definitions of ‘industry’

Global
software

Firm

Australian retail
computer software
manufacturing

Source: CPA Australia 2020.

For instance, an analysis of the ‘global software’ industry includes all organisations producing any
kind of software wherever they operate in the world — clearly a much more complicated analysis than
if the focus were on only those firms that produce software in Australia. However, this wider definition
minimises the risk of missing new trends, which often come from new entrants and substitutes. A narrow
definition, such as the ‘Australian retail computer software manufacturing’ industry, makes it much easier
to analyse, but also increases the likelihood that new trends may be missed, especially those developing in
overseas markets. For example, many bookstores closed because of rising online book purchases and the
move to e-readers, tablets and e-books. Many bookstores did not include online sales in their definition
of their industry, thereby noticing the trend too late to recover. The same can be said for the Blockbuster
video rental chain. They believed they had an unbeatable position within the home entertainment industry
and completely underestimated the impact streaming services, such as Netflix, would have on their future
viability. Within just a few years, Blockbuster went from an expanding multinational operation with
billions of dollars of revenue to bankruptcy and liquidation. Ironically, Blockbuster had turned down the
opportunity to purchase Netflix for just US$50 million in 2000.
It can be very tempting to define the scope of an industry narrowly in geographic terms, especially if the
majority of an organisation’s sales are based in that region. The potential pitfall here is that competitors
from outside this region may have included your region in their industry scope. If that is the case, you
will be on their radar, but they will not be on yours. You could miss an important industry development or
move, purely because of how the industry being analysed has been narrowly defined.
Similarly, an industry definition can sometimes be too focused on what is being produced now, and
in doing so fails to recognise the overarching customer need that is ultimately being satisfied with the
product or service. Such an oversight can have drastic consequences for an organisation. For example,
the automobile industry long ignored inputs from environmentalists, scientists and politicians advocating
the need to develop the use of alternative energy sources. Many automobile companies overlooked this
need to consider the societal context of their products, and now find themselves perceived as a symbol
of rampant energy consumption. Additionally, the industry needs to be viewed in the context of customer
groupings so that each target market can be identified and a strategy developed accordingly.
Some companies have very few competitors globally and it is therefore quite appropriate to define the
industry as being global. These companies are often characterised by high barriers to entry (barriers to entry
are discussed in more depth later in this module), limited markets for what they produce and proprietary
know-how (such as patents). For example, Cochlear is an Australian company with 60% world market share
for implants that enable severely deaf people to hear (Intelligent Investor 2018). It spends approximately
13% of its revenue of more than AU$1.4 billion on research and development (R&D) (approximately
AU$180 million) to protect and improve its technology and stay ahead of competitors (Cochlear Limited
2019). It only has two main rivals, the Advanced Bionics Corporation in California (a unit of Boston
Scientific Corporation) and Med-El Corporation in Austria, as well as a number of smaller competitors
around the world. Cochlear must think about and define its industry on a global scale.
It is important to note that there is no ‘right’ or ‘wrong’ way to define an industry. The definition simply
determines what information is analysed under each particular heading. Under a narrow definition of the
industry, competing products or services from outside that definition are not ignored, but can be handled as
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80 Global Strategy and Leadership

substitutes or new entrants in the industry analysis framework, which we will discuss later in this module.
The important issue is to be consistent throughout the analysis.
Typically, a CPA will work in an organisation that has a clear idea of the industry (and markets) within
which it operates. As you work through this module, you will note that all industries change over time.
However, the industries that prosper in the longer term are those that are perceptive enough to recognise the
changes taking place in their environment and markets, and have the capabilities to put in place strategies
to respond to these changes. The challenge for strategic leaders is to be open to shifting parameters in
regard to the industries in which they operate.

QUESTION 2.2

Consider the table below and identify the industry each organisation would be associated with.

Organisation description Industry

Ride-share operator

Subscription air travel service

Provider of ‘smart’ technology for household devices

Vegan restaurant

Vegetarian clothing manufacturer

Car parts manufacturer

R&D facility

IT service

THE INDUSTRY VALUE CHAIN

Having considered the industry definition, the next step is to determine the position of the industry
in the industry value chain. The value chain for an industry comprises the business processes, people,
organisations, intellectual property, technology and physical infrastructure that transform raw materials
or talents into finished goods and services, which are offered and distributed to the consumer to satisfy
demand. For service industries the value chain concept is the same, but rather than converting a physical
product it could be the conversion of ‘know-how’ into a format, such as advice that is offered to clients.
Understanding the value chain is an essential part of analysing and understanding an industry. Different
industries have different value chains, and each stage of the chain can comprise a number of competitors,
each of whom may have operations in one or more stages of the chain. It is important that an organisation
understands where it is positioned in the value chain, and what activities are taking place both upstream
and downstream from where it is positioned.
Again, as with the definition of industry, there are no wrong or right answers to defining an industry’s
value chain. A generic value chain is shown in figure 2.7. It shows how a raw material can progress through
the value chain, finishing with sales to the end consumer.

FIGURE 2.7 A generic value chain

Supply Demand

Raw Logistics Sales to

Raw Product
material Purchasing Manufacturing and Merchandising end
materials design
processing distribution and retailing consumer

Upstream Downstream

Source: CPA Australia 2020.

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MODULE 2 Understanding the External Environment 81

 Example 2.2 includes a value chain constructed for the fresh food industry.

EXAMPLE 2.2

Fresh Food Industry Value Chain

Figure 2.8 is a value chain for the fresh food industry. Once the value chain is agreed upon, it is much
easier to understand and assess the future opportunities that the industry might offer or any aspect of the
value chain that might require further education and training.

FIGURE 2.8 A value chain for the fresh food industry

Food
service

Mass
retail
Inputs
(pesticides, Farming Packaging Distributing Consumer
labour)
Grocery
Land Milking Selection Road

Soil Feeding Packing Rail Exporting

Climate Dipping Cutting Sea

Water Seeding Labelling Air

Drainage Harvesting Size

Ploughing Load

Fertilising

Spraying

Source: CPA Australia 2020.

The value chain in example 2.2 has been broadly applied to the fresh food industry around the world;
however, it can also be narrowed down to focus on a particular region and its specific geographic value
chain. Individual organisations can be much more targeted about their industry value chain, building a value
chain that is specifically targeted to their activities and operating context. This also includes deciding on
locations around the world where components and activities of the value chain may be carried out.
A key proposition of value chains is that new ‘value’ is created at each stage of the chain from the
activities and processes undertaken in that component of the chain.
Value is typically judged from the traditional perspective of economic value — that is, value created by
taking a resource or set of inputs, providing additional inputs or processes that increase the value of those
inputs, and thereby generating a product or service that has greater market value in the next component
of the value chain. Measures of economic value creation have been refined over centuries, resulting in a
host of performance measures, including return on investment, debt–equity ratios, price–earnings ratios
and numerous others.

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82 Global Strategy and Leadership

 QUESTION 2.3

Draw a value chain that shows the main activities in the value chain for coffee. In your diagram,
consider the following.
• What are the inputs?
• What processes are involved?
• What products are made?
• How are they distributed?

Consider the simplified production value chain for a pair of fine-wool trousers shown in figure 2.9.

FIGURE 2.9 A value chain for a pair of fine-wool trousers

Estimated returns Dirty Wool Woven

Yarn = Trousers =
per kg at each stage wool= tops = fabric =
@$28/kg @$700/kg
of the value chain @$7/kg @$11/kg @$70/kg

Design,
Cost process at Scouring, garment
Sheep
each stage of the Shearing carding and Spinning Weaving making,
farming
value chain top-making retailing
etc.

Source: Adapted from R Wallace & P McSweeney, 2006, Case Study 1: Supply Chain Innovation 1, Australian Wool Education
Trust, Sydney, figures 1 and 4, pp. 4, 7, www.woolwise.com/AWET_Resources/Case_01_Supply_chain_innovation.pdf.

It can be seen from figure 2.9 that the cost processes at each stage of the value chain result in increasing
returns per kilogram at each stage of the industry’s value chain. At the same time, however, the quantum of
investment (and therefore risk) for the organisations operating in the various value chain components also
experience increasingly higher costs as the chain progresses towards product or service consumption. The
capital investment in textile processing machinery for processes such as spinning and weaving is very high,
as are the costs associated with, for example, brand creation and maintenance. It is easy to see how the
initial AU$7 per kilogram of wool transformed to a AU$700 per kilogram pair of fine-wool trousers that
retailed for AU$200. However, what is less easy to see and understand are the costs and risks associated
with the value chain processes undertaken between these two end points — this is a common complaint of
the producer of the initial raw materials who thinks they are being exploited by those involved in the later
stages of the chain. As you will see later in the module, this could in fact be because the initial suppliers
of the raw, dirty wool simply have low supplier power.
Value chains for different industries take varying amounts of time and investment. For example, new
drug development takes much longer and requires significantly more investment — estimated at 15 years
and up to several billion dollars — than the manufacture and sale of a pair of woollen trousers. Profes-
sional services organisations offer a number of technical services to assist in improving the customer’s
operational and organisational performance.
As shown in figure 2.10, the value chain can be similarly applied to the supply of services as it is to
the manufacturing and supply of products. Where, in manufacturing, the supplier takes wool and ‘adds
value’ to eventually produce a pair of trousers to satisfy consumer demand, service industries add value
with knowledge sharing, time and personal skill sets. Professional services are often provided by a team
of various people, all of whom undertake differing tasks. The value chain is based on activities that
the service providers undertake in order to deliver their particular service. The list beneath each activity
shows the particular tasks which add value to the activities and in turn, the customer. Collaborating with
the whole team and discussing the most value-adding activities will assist in creating the most accurate
value chain.
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MODULE 2 Understanding the External Environment 83

 FIGURE 2.10 A professional services value chain

Identify Deliver Maintain

Develop Sell service Close the
target service client
proposal to client account
client product relationship

• Conduct • Discuss and • Meet with • Fulfil • Make final • Follow up with
research identify client client to obligations changes as per client six
• Identify client needs discuss set out in client request months on
in need of • Propose single concerns or statement • Hand over • Identify any
assistance or numerous questions of work deliverables other areas of
• Approach client solutions • Develop • Work • Hold a closing inefficiency or
professionally • Organise contract terms collaboratively meeting with requiring
client service fair to both with client client and assistance
through
any prior
team to the parties • Respond to service team • On-sell further
satisfaction • Clearly set out client needs services
relationship/
contacts of client budget and • Implement any
• Prepare timelines required change
proposal
for client
information
sharing

Source: CPA Australia 2020.

Ideally, returns for each component of the chain should be similar (e.g. for every dollar invested there is a
similar return on investment for each component of the chain). Benefits need to be experienced and shared
by all of the components in the chain, or the chain could become dysfunctional and inefficient. However,
in reality, the forces of competition in a global industry mean that this is not always the case. Example 2.3
illustrates how the value in a chain can move between components over time, and this is influenced by the
interplay of myriad complex factors.
Where limited or reducing value is being experienced by any component in the chain, competitors in
that component of the chain either go out of business or switch to alternative enterprises if they can.
Generally, the unique capabilities required to be successful in each component of the value chain
provide a protection mechanism against being subsumed into the previous or subsequent component of
the chain. Where this is not the case, that component of the value chain is likely to cease or be absorbed by
organisations active in upstream or downstream components of the value chain through vertical integration.
For example, the wholesaling function in many value chains has suffered in recent years because this
capability is not seen as being particularly difficult to acquire and does not add significant value to either
manufacturers or retailers. Apple has opened up various channels for product sales, specifically focusing on
retailing at Apple stores, where the experience of the store draws in customers, reducing customer demand
at Apple distributors. Although Apple remains as a wholesaler to other retailers, it closely manages these
retailers through tight pricing and margin controls to avoid any competitive pricing.
The decline in wholesaling has been compounded by the trend for large wholesaler customers to seek
to purchase directly from manufacturers, thus saving some of the costs and capturing some of the profits
associated with the wholesaling function. The bricks-and-mortar retail industry has had to compete with
online stores, which have few overhead expenses. One way this has occurred has been by purchasing
products straight from the designer, as opposed to using agency and wholesale providers. For example, after
suffering financial hardship and minimal profits, major retailer Kmart Australia now sources the majority
of its stock directly from the manufacturing source, entirely eliminating the ‘middle-man’ suppliers and
distributors. Children’s wear and intimate apparel have seen price reductions of up to 50% as a result of this
direct sourcing strategy, passing on price cuts to customers while attracting more customers and increasing
revenue. (You will note further in this module how the concepts of an industry value chain are linked to
the factors that drive industry profitability.)
Consequently, while a value chain can be drawn as a simple series of components, in reality the
interrelationships are complex and each component represents an ‘industry’ in its own right. Example 2.3
illustrates aspects of this in relation to the value chain for the pharmaceutical industry.

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84 Global Strategy and Leadership

 EXAMPLE 2.3

The Global Pharmaceutical Value Chain

The value of the global pharmaceutical industry in 2018 is estimated to be greater than $AU1.1 trillion and
has grown at an annual growth rate of more than 4.5% over the last four years. It is estimated that the
rate of growth will accelerate over the next five years due to a significant boom in spending from emerging
countries such as China, reaching a total value of $AU1.4 trillion by the end of 2023. Geographically, the
United States, China and Japan are the largest markets, followed by Western Europe (Market Industry
Profile 2019).
The number of medicines available has steadily risen over the last century. At the present time there are
over 1000 medicines under development, with companies investing large proportions of their revenue in
R&D, the primary driver of competitiveness in the industry.
Figure 2.11 shows a value chain for drug discovery.

FIGURE 2.11 A value chain for drug discovery

Illustrative Manufacturing
Distribution Dispensing
of drug

• R&D manufacturing • Medicine acquisition • Medicine

costs • Handling & delivery acquisition
• Import duties and • Obsolescence costs • Labour, facilities,
Cost incurred taxes • Capital costs equipment
• Promotion and • Promotion and • Medicine wastage
education education • Capital costs
• Education

• Innovation • Ensuring continuous • Medicine

• Regulatory medicine supply availability
documentation • Waste management • Pharmacist advice
Value added • Quality assured • Order processing • Patient
manufacturing • Education convenience
• Education • Additional health
services

Source: M Aitken, 2016, ‘Understanding the pharmaceutical value chain’, Pharmaceuticals Policy and Law, 18,
pp. 55–56.

In the drug development value chain, there is really only one valuable product: the drug or vaccine
that the patient takes. The majority of promising molecules (called leads) never make it through testing.
Research, testing and delivery have defined the industry’s value chain since the industry started, and
the major pharmaceutical companies generally participate in each of these activities, either directly or, in
the case of research, often through partnerships with research organisations, such as universities. There
is significant cost associated with these activities, from drug discovery to testing and clinical trials, the
submission of applications to regulatory agencies as well as promotion and education to stakeholders.
The ‘reward’ for incurring these costs is a ‘grace period’ where the original manufacturers enjoy exclusive
access to the market (through patents). Once the patent expires, other manufacturers can produce generic
products based on the original. As they have not incurred the front-end costs, their manufacturing costs
are much lower, resulting in lower prices. The value they add is to provide competition in the marketplace
and access to price-sensitive consumers.
The distribution of pharmaceuticals is largely carried out by importers and wholesalers. They act as
conduits between the manufacturers and the retailers to ensure continuity of supply. It is a complex
distribution process with a variety of products, from many manufacturers to a number of pharmacies,
often requiring short timeframes and passing rigid handling standards. Distributors are then subject to
warehouse costs, retail credit cycles and currency fluctuations.
Retailers are tasked with dispensing the right drug, to the right patient, at the right dosage. Other value
added at this stage include, labelling, advising and educating the consumer on the correct use of the drug.
Many pharmaceutical companies and even countries are now trying to capitalise on the value that
each stakeholder is already bringing to the healthcare system, and exploring how efficiencies can be
gained in the overall system. For example, increasing costs for R&D have compelled major pharmaceutical
companies worldwide to outsource part of their research and manufacturing activities to lower-cost,
developing nations such as India and China. A further trend is that in recent years, smaller pharmaceutical
companies in Asia, particularly in China, South Korea and India, have been able to successfully undertake
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MODULE 2 Understanding the External Environment 85

 some components of the drug discovery value chain due to their ability to retain their cost advantage
while matching the quality standards of the more mature manufacturing countries.
The drug development process today has a sequence of rigorous and highly defined stages subject
to stringent rules and regulations that enable progression to the next stage. These ‘rules’ can vary
across different geographic jurisdictions, and there are significant efforts to ‘harmonise’ these rules and
regulations around the world. The aim is to develop global policies that strike a balance between preserving
the viability of each component in the value chain and making medicines available and affordable
to patients.

Globalisation of value chains adds a level of complexity when the components of the chain may be
carried out in different parts of the world. Multinational and global organisations often organise for
different functions in their own internal value chain to be carried out at different locations around the
world, taking advantage of differences in factors of production in those locations. Consider the automotive
industry, for example, where engines may be manufactured in one location, car body parts in another
and so on. Similarly, industry value chains can be organised in multiple configurations. The textile
industry was one of the first industries in which globalisation occurred, and today the Australian textile
industry imports and exports along the entire value chain. For example, the ‘spinning industry’ (spinning
of fibres into yarn for weaving or knitting fabric) is almost non-existent in Australia today compared to
30 years ago.
Another trend associated with the changing landscape of the value chain is the concept of ‘offshoring’.
Offshoring is when an organisation sends certain functions overseas, often to countries where labour is
cheap in order to cut costs. Offshoring has been facilitated by IT and telecommunications development,
allowing those offshore to communicate and operate easily with their foreign counterparts. Often it is the
support functions of an organisation which are subject to offshoring, including human resources (HR),
customer service (call centres) and finance. To a limited degree, core activities of an organisation have
also been subject to overseas relocations. Fifarek and Veloso (2010) discussed this in regard to innovation
activities, such as R&D, as they are more frequently being redistributed to global locations. There has
been an increasing geographic dispersion of R&D despite its status as a more highly valued component
of the value chain. However, highly technological R&D remains prominent in high-income regions, with
more offshoring occurring with low technological R&D work where cost reductions outweigh the value
of potential developments. Offshoring comes with many challenges as it also exposes the organisation to
the many external forces of the offshore destinations.
Another option for organisations is to completely outsource components of the value chain. This decision
may be in order to optimise current operations, or due to changes in the value chain that require capabilities
not currently available within the organisation. Not surprisingly, the types of capabilities often outsourced
include technology. Technology insight 2.1 provides some data on IT outsourcing.

TECHNOLOGY INSIGHT 2.1

IT Outsourcing
A recent study found that many companies are outsourcing their IT budgets, with the total percentage
of IT budget being spent on outsourcing increasing from 9.4% in 2018 to 12.7% in 2019 and 34% of
companies now outsourcing some of their network operations (Sprouse 2019). This could be for various
reasons, but it is likely companies are simply becoming more comfortable with outsourcing IT functions
and perhaps realising that their own IT capabilities cannot keep up with the pace of technology as well as
specialist providers can. Interestingly, small companies are adopting cloud technology faster than large
companies, and are often used as indicators of changes in technology use. Cloud-based computing is
particularly attractive to smaller businesses as they can avoid the potentially substantial cost of buying IT
infrastructure and people to run it
While application development accounts for 56% of outsourced IT functions, other areas for outsourcing
include application maintenance, data centre operations, database administration, desktop support,
disaster recovery services, help desk services, IT security, network operation, system implementation/
integration and web operations.

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86 Global Strategy and Leadership

 Leaders and managers need to consider the risks and benefits before deciding to offshore or outsource
components of the value chain. They need to ensure that the organisation has the capabilities to manage
the change and to address any potential challenges associated with it.

QUESTION 2.4

Consider the value chain in the pharmaceutical industry (see figure 2.11).
• Explain which of these components could be taken offshore or outsourced.
• Explain the advantages and/or disadvantages of this change.

INDUSTRY SEGMENTATION
Once the industry and its value chain have been defined, the industry can then be broken down into
segments. Segmentation refers to breaking things into groups based on their characteristics.
Typically, segments are based on the characteristics of products or services offered, and there can be
several of these within an industry.
As with industry definition, segment definition is often a function of the availability of data to analyse.
However, this analysis often reveals important insights into industry trends, as most segments grow at
different rates and have different profitability profiles. Analysing and understanding this data provides
information to support the external and industry environment analysis.
Figure 2.12 provides an example of particular product segments that exist within the retail clothing
industry. Some organisations may choose to be involved in all segments within an industry, while others
may focus on only one. A disruption in an industry can also lead to the introduction of completely new
segments. An example would be the ‘ride-sharing’ segment of the transport industry.

FIGURE 2.12 Segmentation of the retail clothing industry

Accessories: 12.0%

Infants’
apparel: 6.9%

Childrens’
apparel: 10.7%

Women’s
apparel: 49.6%
Men’s
apparel: 20.8%

Source: Data from IBISWorld 2018.

When analysing a segment the type of information needed includes:

• segment definition — what it does and does not include
• total segment size — volume and value broken down where appropriate
• average annual growth rate for the past five years (10 years if possible) — preferably, this should be real
growth (after inflation has been taken out, if this figure is known)
• long-term potential — competitive and disruptive forces that may impact long-term viability
• an explanation of the data.
Industry segmentation analysis allows the organisation to clearly understand the industry within which
it operates, its profitability and growth potential as well as its long-term viability. Example 2.4 examines
one segmentation approach to the Australian domestic airline industry prior to the COVID-19 crisis.

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MODULE 2 Understanding the External Environment 87

 EXAMPLE 2.4

Segments in the Australian Domestic Airline Industry

By late March 2020, the federal government had committed AU$715 million to prop up Australia’s airline
industry, crippled by the closing of national and even state borders as part of international efforts to
manage the COVID-19 crisis. Even so, Australia’s second major airline Virgin Australia approached the
federal government seeking a AU$1.4 billion bailout. Qantas, having taken a AU$1.05 billion loan secured
against its fleet of planes, was not seeking a bailout, but said to keep the competitive landscape even and
fair, such a bailout for Virgin would need to be matched by a loan to Qantas of AU$4.2 billion. This figure
reflected the relative revenues of the two airlines.
The Australian domestic airline industry can be regarded as a duopoly of these two companies. Qantas
also owns and operates budget carrier Jetstar. Virgin Australia also owns and operates budget carrier
Tiger Air. A number of small airlines service particular routes in regional Australia and do not directly
compete with the major players. Regional airlines had been significantly affected when the downturn in
the resources sector led to a decrease in demand for flights by FIFO workers. This was exacerbated by
the COVID-19 crisis, and the federal government was forced to intervene to save the regional airlines and
thus secure the future of air services in regional Australia.
Table 2.1 lists a selection of the licensed airlines operating at the end of 2019.

TABLE 2.1 Australian domestic airlines

Home state Airlines

Northern Territory Airnorth

Fly Tiwi
Hardy Aviation

Queensland Alliance Airlines

Fly Corporate
Hevlift Australia
Hinterland Aviation
Pacific Air Express
Qantas
Skytrans
Sunstate Airlines
Toll Aviation
Virgin Australia
West Wing Aviation

South Australia Cobham Aviation Services Australia

New South Wales Airlink

Eastern Australia Airlines
Express Freighters Australia
Fly Pelican
Pel Air
Qantas
Qantas Freight
Regional Express Airlines
Sydney Seaplanes
Tasman Cargo Airlines
Toll Aviation
Virgin Australia

Victoria Jetstar Airways

King Island Airlines
Qantas
Qantas Freight
Regional Express Airlines
Sharp Airlines
Tigerair Australia
Virgin Australia

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88 Global Strategy and Leadership

 Western Australia Maroomba Airlines
Network Aviation
Skippers Aviation
Virgin Australia Regional Airlines

Tasmania Par Avion

Skytraders

Beyond the major operators and regional airlines, small operator Airly’s business plan focuses on
subscription-based private flights — payment of a monthly fee entitling customers to unlimited flights on
several important domestic routes. This innovative business model appeals to corporate travellers seeking
to minimise the time involved in air travel — it is much quicker to board and disembark private flights.
Industry Segmentation
There are various ways to segment an industry. One useful way to understand the Australian airline industry
is to segment it according to the type of service offered. For example, on the left of figure 2.13, the industry
is segmented by passenger, freight and other services. On the right side, the passenger segment is further
broken down into budget-fare and full-fare segments.

FIGURE 2.13 Industry segmentation of the Australian domestic airline industry

Supplementary Supplementary
services: 7.8% services: 7.8%
Freight: Freight:
2.6% 2.6%
Passenger:
89.6% Full-fare
passenger:
67.0%
Budget-fare
passenger:
22.6%

Source: Data from IBISWorld 2018.

It can be seen from figure 2.13 that most industry revenue arises from passenger transport. A small
amount arises from freight and supplementary services (e.g. booking fees and in-flight catering). Each
segment has unique characteristics. Full-fare passengers services are often the choice of business
travellers seeking convenience, the ability to change flights and the overall higher level of service.
Operators have reduced capacity dedicated to business travel over the past several years even though
business travel itself has grown. The profitability of the segment per passenger has grown, but the decline
in capacity means revenue overall has decreased. The budget segment targets money-conscious personal
travellers. The major operators Qantas and Jetstar have targeted this segment with their Jetstar and Tiger
Air operations respectively. The budget carriers tend to charge extra for things that are included in the
full-fare segment (e.g. choice of seat and on-board drinks and meals). They also minimise costs by having
less variety in aircraft — thus reducing maintenance and parts costs. The freight sector competes with
road and rail freight services. It often carries time-sensitive, high-value goods.

QUESTION 2.5

Which segment(s) do you think Airly’s business model would impact on the most? Why do you think
this? What do you think the impact will be?

THE INDUSTRY LIFE CYCLE

As introduced in module 1, most industries have a life cycle — the industry life cycle goes through a
start-up phase, a growth phase, a maturity phase (usually by far the largest phase), a shake-out and a
decline phase. However, many industries tend to renew themselves and regrow through the use of different
technologies, new strategies and product and service innovation, rather than decline. This distinguishes the
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industry life cycle from a product life cycle (in which specific products and services tend to eventually enter
terminal decline). The life cycle position of the industry is an important factor in formulating organisational
strategy, so it is relevant to understand the life cycle stage of the industry.
Different strategies are required at different points in an industry’s life cycle phase or stage and, as
mentioned in module 1, different styles of leadership and management are also often required at each of
the stages. Throughout the life cycle, the structure and environmental and competitive forces that influence
an industry change. As such, an organisation needs to be adaptable.
Figure 2.14 summarises the impact on the industry of these strategies against the industry life cycle,
which are explained in more detail in the following sections.

FIGURE 2.14 Industry life cycle

Revenue
$

Cash

Profit

Start-up Growth Maturity Shakeout Decline

or
renewal
Industry life cycle

Source: Adapted from WE Rothschild, 1993, Risktaker, Caretaker, Surgeon, Undertaker: The Four Faces of Strategic Leadership,
John Wiley & Sons, New York, figure 3.1, p. 32.

Start-Up
In the start-up phase, the industry is new and there are few competitors, and nor is there any threat of
substitutes. The power of buyers is low because there are few alternatives. The power of suppliers, however,
is relatively high as the industry is yet to have a significant impact. Typically, at this point of the life cycle,
there will be many different visions (from the organisations) as to how the industry will develop and many
different approaches to the industry, in terms of product type, features, performance and target markets.
In the introduction stage, leaders and managers need to be innovators. They need to be nurturing
relationships with both suppliers and early adaptor buyers. Resources are often limited and need to be
invested in R&D. This often leads to negative cash flow as they aim to build market share at the expanse of
short-term profitability. The organisations that optimise this phase often become leaders in the industry.
An example of an industry in its introduction phase is Internet of Things (IoT). This industry allows a
network of automated devices to work together to turn a normal house into a ‘smart’ home. This industry
provides exciting opportunities for both new organisations and existing ones to expand the products and
services offered. Lighting, thermostat, home security, appliances and even toilet seats can be modified to
use ‘smart’ technologies and connect to a home network.

Growth
Once an industry becomes established and grows rapidly, it enters the growth stage. This phase sees a
surge in new competitors, as new players enter the growing industry. As they are yet to gain market share,
however, rivalry is low. The power of buyers is still relatively low as there is a supply shortfall — that is,
demand still exceeds supply.
High-growth rates enable most organisations to survive. Although cashflow improves at this stage, cash
remains short as funds are needed for investment to cater for the high-growth rates and expansion plans.
Leaders and managers will be primarily concerned with keeping up with current demand, not looking
towards the future. Because the industry is growing quickly, competitive differentiation is not of critical
importance at this stage and there is ‘enough room for everyone’ in the industry. However, now is the time
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90 Global Strategy and Leadership

for the leaders and managers to support product expansion and improve distribution in order to position
themselves for the more competitive landscape of the mature stage.
The ride-share industry is now in its growth stage in Australia with annual growth over the past five
years of 51.7%. The number of businesses in the industry has also grown by over 50%, with Uber now
joined by other organisations such as Ola and Bolt. Uber, as the first mover, has since expanded into new
territories and new segments with UberEats (IBISWorld 2019).

Maturity
As growth rates reduce towards more normal rates, the industry enters the maturity stage. Rivalry is
intensified, and some companies may consolidate through mergers. During the maturity phase, supply
will start to match demand (supply reaches the level of demand). As such, buyers will start to have greater
power than before. This is the stage in which a majority of industries stay for most of their lives. Customers
become more knowledgeable and demanding and not all of the original products, organisations or strategies
will survive.
At this stage, cash flow should be positive. Leaders and managers focus on efficiency, cost control and
market segmentation. Strategic management concepts come to the fore in this stage as it is no longer a case
of simply producing to meet ever increasing demand. Strategies are developed to defend market position
and maximise profits.
The sportswear industry can be classified as mature. Although new products are constantly being
developed by key players in the industry such as Nike and Adidas, this is to penetrate more of the existing
market, rather than ‘grow’ with the rest of the industry.

Shake-Out
It is inevitable that a shake-out stage will occur. This stage is characterised by a plateau and a possible
decline of growth and profitability in the industry. Many organisations in this stage will leave the industry
due to their low returns, thereby reducing rivalry and competitiveness. The remaining, small group of
organisations then dominates the industry, through mergers, acquisitions and takeovers, dominating with
their own products. It becomes imperative that organisations in this stage protect their positions and
maintain profitable operations.
The challenge for leaders and managers at this stage is whether to leave or stay and defend their position.
Both options are viable and depend on what is happening in the external environment as well as the
organisations’ own capabilities.
The retail industry is going through this phase at the moment with the of many stores closing and going
into liquidation and large chains consolidating and closing low performing stores (New Daily 2019). 2019
saw the closure of Jeanswest, TopShop, Ed Harry, Napoleon Perdis, Gap, Esprit, ToysRUs, Roger David
and Shoes of Prey in Australia alone. Many retailers who have survived are consolidating and closing
unprofitable stores (EB Games closed 19 stores in January 2020, while Harris Scarfe and Bardot plan to
close 21 and 58 stores respectively during 2020). The rise of online shopping (a new, disruptive segment
within the industry), has challenged the traditional bricks-and-mortar model of retailing. This coupled with
a new ‘discount driven’ focus of customers has made it difficult for all retailers to remain competitive.

Decline or Renewal
The industry enters the decline stage once growth and profitability are in clear decline. The threat of
substitutes at this stage is not only high, but can also be a catalyst for an industry’s decline. At this time, a
large number of organisations may leave the industry as the return on investment (ROI) is unsatisfactory.
Domination of the industry by a few large competitors no longer yields sufficient returns and even these
companies leave the industry. The industry’s products or services may no longer be useful to consumers as
they have been replaced by newer technology. Consider an abacus-manufacturing industry that lost product
relevance when slide rules and calculators were invented. There are still companies that make the abacus
today, but the industry is very small and has been in decline for a very long time.
If the industry enters the decline stage — and here industry life cycles differ from product life cycles
in that industries survive for much longer than any individual product as technological changes enhance
industry products — the full use of strategic management concepts becomes even more important to the
leaders and managers as they decide how to maintain a unique position in a win–lose environment. Sales
for one organisation can only be achieved at the expense of other organisations in the industry, unless
profitable new niche opportunities are found. However, an organisation’s strategy is about being creative,
not simply following others in the same industry. Consequently, even in declining industries there are many
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opportunities for leaders and managers to create niches or even to revolutionise the industry. For instance,
low-cost airlines have revolutionised the global airline industry, while Australian wines are growing rapidly
in the international wine industry due to innovative winemaking styles, flavour and value for money, despite
the decline in total wine consumption around the world.
It is also important to note that not all industries move through the life cycle stages at the same rate.
Some industries, for example, may experience a rapid introduction and growth rate, then decline quite
suddenly with little maturity phase.

Disrupting the Industry Life Cycle

Disruptions are defined as sudden occurrences that emerge out of nowhere to upset established industries
or markets (Gilbert 2003). Contrary to popular belief, disruptions are not necessarily a death nell for
an industry and all its players. It can in fact be an opportunity for organisational and industry growth.
Disruptions are usually associated with technology — think about smart phones, Netflix, Airbnb and Uber.
Figure 2.15 shows the impact of disruptive innovation on the industry life cycle. Technology insight 2.2
examines why established organisations often fail to make the most of disruptive technologies and suggests
how they can avoid this pitfall.

FIGURE 2.15 Disruption and the industry life cycle

Discontinuity
Performance/value offering

Decline New growth

Maturity

Breakthrough

Growth Innovation

Start-up

Effort/time

Source: G Tovstiga & D Birchall, 2004, ‘Capturing opportunity in disruption: strategic capabilities and organization factors’,
https://warwick.ac.uk/fac/soc/wbs/conf/olkc/archive/oklc5/papers/a-3_tovstiga.pdf.

TECHNOLOGY INSIGHT 2.2

Mature Organisations’ Response to Disruptive Technologies

Disruptive technologies often cause established leaders in an industry to fail as established thinking
prevents them from noticing, or taking the new technologies seriously. Think of the video/DVD industry.
Home streaming technology existed before Netflix was created. Had major players like Blockbuster
acknowledged the potential threat of this technology, they could have either bought a streaming service
(Netflix was offered to Blockbuster in 2000), or used their extensive resources and supplier influence to
expand their own offering to include a streaming service. Instead, by ignoring the technology, they paved
the way for Netflix and its followers to carve out a whole new market. Frequently this occurs because
adoption of completely new technologies is slow, and thus not as lucrative as established products and
services. It is not until the new technology matures to its most efficient format that it begins to truly impact
on the market leaders. It is then usually too late for the established players to begin investing in these
technologies or capabilities.
Figure 2.16 graphically represents stages in the industry life cycle where existing businesses can
potentially mitigate the impact of disruptive technologies. Organisations that successfully navigate this
cycle understand that even though a new technology may be clunky or unpopular, the potential it has to
serve segments of their current market, or even other, unserved markets. Recognising this, they then invest
in capabilities to manage the introduction of these new technologies in their firm. As established players,
they are often in the best position to capitalise on these new technologies as they have more resources to
invest in them than the new start-ups. They typically have three options in building capabilities: 1) in-house
development — assuming that the organisation has the resources and expertise required; 2) independent
spin-out — outsourcing the innovation to another entity with the required expertise; 3) acquisition — buying
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92 Global Strategy and Leadership

 the start-ups is another way to ensure you gain the relevant capabilities and future proof yourself against
the disruption.
In the retail clothing market, established players that embraced the e-commerce environment in its early
stages have more successfully navigated the change than those that arrogantly believed that their physical
presence and position was all the strength they needed to remain competitive.

FIGURE 2.16 Why organisations fail to take advantage of disruptive technologies

3.1 Incumbents begin

2. The media to realise the threat
coverage
creates inflated
expectations Tipping
point
Expectations

3.2 Incumbents
Invest in small
experiment
4. The technology
and the start-up Too late!
1. The technology 3.3 Experiments ecosysteam reach
and the ecosystem of do not live up to early maturity
start-ups emerge expectations
Incumbents Direct threat Call for
slow down to the core action
0. R&D projects business
investment
Time
Source: A Combessie, 2015, ‘Resistance to disruption: interpretation of the hype cycle’, Medium, 1 May,
https://medium.com/@alex_combessie/resistance-to-disruption-interpretation-of-the-hype-cycle-8393f7fb3bf8.

In order to navigate a world where disruptions are becoming more and more prevalent even in the most
mature, established industries, organisations need to change their entire way of working. The need to
move from a highly structured optimisation focus to one that is ‘flexible’. This requires strategic and
decision making, where organisations focus on their capabilities first and how best to develop and use
these capabilities to maintain a competitive advantage. By effectively analysing their internal and external
environments, they are not only aware of new technologies, but invest in new capabilities in order to use
the disruption to create growth for themselves and the industry as a whole.
Example 2.5 describes changes occurring in the accounting industry. This example will form the basis
of various questions throughout the rest of the module.

EXAMPLE 2.5

The Silent Disruption of the Accounting Services Industry

Amid the protest of taxi drivers against ridesharing, the headlines of more manufacturing companies
closing and uproar over telecommunications jobs moving overseas, the mature accounting services
industry is quietly undergoing a dramatic innovation transition. And, the $AU1 billion Australian FinTech
industry is not the only one to blame.
‘Disruptive technology’ has been commonplace business language since it was first coined in 1995
by CM Christensen. Twenty-five years later, there are not many industries which have been immune to
innovation. The accounting services industry is no exception. In fact, it was one of the first Australian
industries to innovate online systems. In 1999, the ATO launched its first online tax submission for
individuals, followed by the first business portal in 2004.
Yet disruption has not (yet) impacted the core role of the industry to provide accounting services
such as auditing of accounting records, preparing financial statements, preparing tax returns and
bookkeeping. This is because financial technology (FinTech) has always been designed for accountants to
do ‘accounting’. Therefore, the accounting services industry has required minimal reinvention and remains
a necessary obligation for Australians.

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 In 2018, the NAB Key Insights into the Australian Accounting Industry Report highlighted that 96% of
small to medium businesses (SMEs) use accounting services. And the ATO Statistics Division showed an
increase in businesses utilising tax agents to lodge tax returns and Business Activity Statements (BAS).

TABLE 2.2 Businesses which utilise a tax agent to submit tax and BAS

Financial year Agent Self preparer Total

2013–14 1 630 000 1 870 000 3 500 000

2014–15 1 770 000 1 770 000 3 540 000

2015–16 1 910 000 1 730 000 3 640 000

2016–17 2 050 000 1 680 000 3 730 000

2017–18 2 140 000 1 680 000 3 820 000

Source: ATO Taxation Statistics, April 2019.

In addition to this, the ATO estimated that in 2016, 74% of Australians still consulted a tax agent to
lodge their tax returns.
There is arguably no other Australian industry that can boast such market dominance. But hidden behind
these impressive figures are signs the accounting services industry is already amid a major transition.
The Accounting Services Industry Success Façade
Research released by benchmarking.com.au has uncovered the accounting services industry has lost its
growth momentum and is now losing its value proposition. The firm’s findings, which analyses a sample
of 184 accounting firms across Australia, showed average net profit for SME accounting firms in Australia
decreased by 41% from 2013–18; revealing the industry is well into its mature life cycle.

FIGURE 2.17 Australian accounting firms’ average net profit

45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2013 2014 2015 2016 2017 2018 2019 2020

Australian Bureau of Statistics data also reveals that the five-year average annual growth rate of the
accounting services industry has slowed to just 0.97%, compared to the Australian average of 2.18%.
Benchmarking.com.au, an online comparison tool that analyses the financial performance and produc-
tivity output of thousands of Australian businesses, further highlighted that on average, accounting firm
spends 39.51% of their total income on wages and can expect their fee earners to generate AU$3.25 to
every AU$1 the firm invests in their salary. Benchmarking.com.au research analyst Tim Chamberlain said
the industry is starting to move to quality over quantity and ‘The take home message is — the more you
can leverage high-quality staff the more you can drive profits’.
In addition to the benchmarking.com.au findings, a new report by recruitment consultancy Robert Half
highlights that skilled accountants will be in high demand in the next 12 months, with experts forecast
to earn in excess of AU$160 000 p.a. While this may be good news for highly skilled accountants, for
business owners, increase in wages is just one cause in the decline of average net profit.
In addition to higher business costs, the demand for high level skills and big pay packages means a
growth-decline of overall jobs in the industry is imminent.
Despite being resilient to change over the past decade, administration and repetitive positions within
the accounting services industry are forecast to decline the next five years. The Department of Jobs and
Small Business predict accountants and payroll clerk positions will only increase by approximately 4% by
2023, with accounting clerk positions forecast to decrease by 1.1%. The total growth gain across the four
employment categories is just 2.2%, compared to the Australian average of 7.1% for all industries.

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94 Global Strategy and Leadership

 FIGURE 2.18 Number of accounting businesses in Australia by revenue

35 000 4.00%
3.50%
30 000
3.00%
25 000 2.50%
20 000 2.00%
15 000 1.50%
1.00%
10 000
0.50%
5 000 0.00%
0 –0.50%
2013 2014 2015 2016 2017 2018

Zero to less than AU$50k % Change in total AU$2m or more

AU$200k to less than AU$2m AU$50k to less than AU$200k % Change in all industries in Australia

FIGURE 2.19 Five-year growth forecast compared to Australian average (%)

8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
–1.0
–2.0
Accountants Accounting clerks Bookkeepers Payroll clerks

Increase (%) Australian average increase for all industries (%)

‘Our research proves what many already know: the accounting services industry is — and has been — in
the mature stage life-cycle for more than a decade,’ said benchmarking.com.au CEO Markus Hugen-
schmidt. ‘The stagnated climate of the industry means firms really have two options: innovate and create
a competitive advantage or continue the status quo and watch net profits decline.’
The Long Road to a Rapid Disruption
The accounting services industry is primed for disruption. A 2015 Deloitte Report argued there are five key
catalysts serving as a sign for disruption; enabling technologies, customer mindset, platforms, economy
and public policy. The accounting services industry has all in abundance.
1. Enabling Technologies
Financial technology (FinTech) in Australia is booming. The average business growth in 2017–18 was 125%
and it is forecast the industry will add AU$1billion of value to the Australian economy in 2020. FinTech
dropped to second place in 2018 on Start-up Muster’s most common start-up industry in Australia, only
behind artificial intelligence. FinTech is still being designed for accountants, but it is now focused heavily on
automation and artificial learning. All popular accounting software includes a range of automated systems
including the following.
• Simple BAS reporting via Xero, MYOB and QuickBooks: enabling businesses to report and lodge BAS
quickly (and for free) online.
• Single touch payroll: accounting systems are now integrated with the ATO regarding payroll and all
businesses were required to report via the new ATO single touch payroll system by 1 July 2019.
• Real-time reporting: online payments, automated bank feeds and automated cost reconciliation is
streamlining general accounting processes.
• Super stream: businesses can utilise accounting software to automatically pay and reconcile employee
super payments, reducing time and hassle.

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 Despite these features, it’s artificial intelligence (AI) that will replace large quantities of human accounting
work. A report conducted by the World Economic Forum on how AI is transforming the financial ecosystem
shows that it will shift the value proposition and customer expectation of financial management. Key
findings of the report include the following.
• Increased competition for accounting firms: banks and institutions are forecast to develop AI-enabled
back-office operations into external services for financial management.
• Pricing wars: a ‘race to the bottom’ style price competition will be introduced with firms and institutions
buying customer loyalty at the cost of revenue.
• Automated finance: consumers will have (and expect) real-time, continuous, automated financial
outcomes which will continually improve their financial position.
• Bifurcation of market structure: it is forecast that AI drive a market divide as firms attempt to define
themselves as industry innovators.

FIGURE 2.20 What additional service would SMEs most value/like to receive? The view from SMEs and
accountants*

Service SMEs Accountants

Advice on financial future and growth opportunities 20% 22%

Audit 7% 2%

Bookkeeping 6% 5%

Budgeting/forecasting 10% 4%

Business analytics 17% 10%

Business planning 12% 5%

Business process engineering 11% 16%

Business strategy 21% 9%

Company secretarial services 2% 1%

Financial planning 7% 28%

GST/FBT preparation 6% 0%

Insolvency 2% 4%

Insurance advice 8% 11%

Insurance broking 4% 9%

Legal services 6% 23%

Leasing 5% 5%

Payroll 7% 2%

Property services/advice 5% 19%

Tax return preparation 6% 0%

Tax planning 6% 0%

Technology/IT services 13% 31%

Other 1% 10%

None of these 21% 0%

* The responses from accountants are their perception of what their SME customers want.

2. Customer Mindset
A change in demanded services from business customers is waging new competition between firms
to remain relevant in today’s business climate. The aforementioned NAB Report highlights a disparity
in what additional services SMEs want from accountants and what accountants think SMEs want. This

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96 Global Strategy and Leadership

 shows that SMEs value services surrounding business strategy, business analytics and advice on growth
opportunities. However, accountants believe value is in financial planning, legal services and IT services.
The report confirms that accountants need to dramatically diversify their business offerings to remain
relevant.
It’s important that accountants don’t stand still. The overriding reason SMEs change their professional
services firm is that their business needs have altered. This means accountants need to move with the
times and modify their service offerings to their business clients as they grow and evolve (NAB 2018.)
3. Platform
Streamlined automated processes, via new platforms, are forecast to have dramatic impacts on industry
employment. The Financial Services IRC’s 2018 Skills Forecast revealed accounting clerk and bookkeeper
positions are poised for disruption with a 97.5% probability of automation for these occupations by
2020. Further, automation of platforms is supporting e-commerce growth across the nation. From
2015–17, the ABS reports that internet income increased from AU$285 billion to AU$394 billion. Online
payments platforms streamline accounting processes by offering automatic stocktaking, reconciliation
and reporting, thusminimising cash lost via theft and human error.
4. Economy
While it can be argued that the accounting services industry has remained stable due to the necessity
of accountants for tax and compliance purposes, the industry is currently experiencing a wave of new
customer expectations which is shifting the demand curve left and, reducing pricing. This is combined
with a slight increase in supply of accounting firms resulting in a reduced value for traditional services. The
mature life cycle of the industry also represents that the industry is reaching market saturation; therefore,
the introduction of any new firms will only decrease shared industry revenues and net profits.

FIGURE 2.21 Supply demand for the Australian accounting services industry

Price level

Aggregate supply (AS1)

(number of firms)

AS2 Increased
number of
firms
P1
new price
level
P2
Aggregate Demand (AD1)
(for traditional accounting services)

AD2 — reduced demand

for traditional services

0 Q1 Qty of firms

5. Public policy
The accounting services industry is greatly driven by ATO policy and compliance requirements. The ATO
is continuing to invest in streamlining and standardising reporting and this includes working closely with
FinTech companies to ensure Australians can remain compliant. In addition, the government invests in its
own technology. The new ATO myTax usage has increased from 1.7 million people lodging their tax return
online in 2014–15 to over 3.5 million in 2017–18. Since 2010, the treasury has also invested in driving
standard business reporting to simplify the process for businesses.
While AI FinTech will greatly impact the industry’s processes, the greater force disrupting the industry will
be the increased intensive competition among SME accounting firms. While less than 1% of businesses
currently change accounting firms each year, 31% of businesses said they would leave their incumbent
services provider if their business needs changed. This is compared to only 5% wanting to change firms
because they didn’t use the latest state-of-the-art technology.
There will always be a requirement for businesses to use an accountant for tax, but as the value earned
per ‘business tax return’ decreases; firms need to look at how they increase value per client — not
necessarily the number of clients.

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 Getting Ready to Rumble
For the foreseeable future, accounting firms will be required to continue to undertake traditional account-
ing. But in order to remain competitive, firms will need to rapidly diversify offerings and revenue streams.
Put simply, the future of the accounting services industry is no longer about offering the basic accounting
and tax service.
Benchmarking.com.au research identified three key success factors accountants will need to implement
to remain competitive and relevant through the disruption.
1. Build customer relationships to increase customer satisfaction. Understanding business customer
needs and demands is just the beginning of the industry transformation. Accountants need to build
relevant products and services for business customers to increase customer satisfaction. This will
support in retaining customer; even when their business needs change.
2. Invest in value added services. Firms need to consider how to increase the perceived value offering
to customers. The research shows net profit is being diluted and this can be rectified with diversifying
services and providing product packages. Firms need to consider how they can add services such as
business strategy, growth strategies and detailed analytics.
3. Improving brand reputation. Memberships and associations are key for the accounting services industry
as they create credibility and confirm compliance. With disruption brewing, firms now need to look
beyond traditional brand associations (such as the CPA) and build relationships with brands that focus
on business growth.
The Future is in the Black
An Accountants Daily survey revealed that while 38% of accountants view new technology as a threat to
their profession, 96% are confident about the future of accounting.
Accountants are, and should be, positive about the future. It is an opportune time for innovative SME
firms to lead the transition and show that accounting firms can be much more than tax agents.
‘In this industry, disruption is not just about inventing new technology systems,’ said Hugenschmidt.
‘The accounting and finance industries have always been privileged with heavy investment into FinTech
(Financial Technology). Real innovation and disruption in this industry will come from re-inventing the value
proposition, and showing that accountants are, and always will be relevant for businesses.’
Source: The Benchmarking Group, 2019, ‘The silent disruption of the accounting industry’, Adviser Voice, www.adviser
voice.com.au/2019/06/the-silent-disruption-of-the-accounting-industry.

QUESTION 2.6

With reference to example 2.5:

• Explain how you would segment the Australian accounting services industry.
• Assess and provide a conclusion about the industry life cycle stage of the accounting services
industry in Australia.
• Explain why you reached this conclusion.

The key points covered in section 2.2 of this module, and the learning objectives they align to, are
as follows.

KEY POINTS

2.1 Select the key concepts, factors and frameworks that relate to understanding the influence of
the external environment on organisational strategy.
• Any strategic analysis must begin by defining the industry.
• An industry value chain comprises the activities, organisations, infrastructure, processes, technol-
ogy and IP that transforms raw materials or talents to finished products or services that meet a
customer need.
• Organisations must understand where they exist within the industry value chain.
• To analyse an industry, the industry is often broken down into segments based on various
characteristics.
• The way in which the external environment impacts on the organisation varies with the industry life
cycle stage.

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98 Global Strategy and Leadership

 2.3 Appraise how the roles of management and leadership drive the organisational strategy in
relation to the external environment.
• In the start-up stage of an industry, leaders and managers need to be innovators, tolerant of
negative cash flow and able to build relationships with suppliers and customers.
• In the growth phase, managers are primarily concerned with meeting current demand, but must also
make preparations for the mature stage, including expanding products and improving distribution.
• In the mature phase, managers focus on efficiency, cost control and market segmentation. Strategic
management becomes the primary approach.
• In the shake-out phase, leaders and managers need to choose whether to defend their position in
the industry or exit.
• In the decline or renewal stage, leaders and managers continue to take a strategic management
approach to create niche opportunities or find ways to revolutionise the industry.
• If an organisation is to survive disruptive technologies, its leaders and managers need to be
able to see the potential of new technologies and invest in capabilities to manage them within
their organisation.

2.3 REMOTE ENVIRONMENT ANALYSIS — GROWTH

Having defined the industry, its value chain, relevant segments and life cycle stage, the environment is then
broken down into two categories for further analysis:
• the remote environment
• the industry operating environment including the competitive environment.
The section of the module discusses the remote environment, which includes those general influences
that affect an industry and are out of the organisation’s control. These include current and expected social,
technological, environmental economic, political, legal and ethical factors. Remote environment issues
affect many industries, but leaders and managers need to understand the effect of these factors on the
growth of the particular industry the organisation is operating in and analysing. For instance, the setting of
interest rates is a macro-economic policy tool designed to influence the general level of economic activity.
However, for the housing industry, interest rates are a prime determinant of the demand for new housing.
Hence, organisations in the residential housing construction industry carefully monitor and forecast interest
rates, and particularly the home loan mortgage rate, to predict future housing demand.
An example of recent external remote environment influence that is becoming more important is
government environmental legislation attempting to counter the effects of climate change. For example,
all home properties being built, bought, sold or rented in many countries including Australia must have
an Energy Performance Certificate that contains information on a home’s energy use and carbon dioxide
emissions. It is not inconceivable that in the future, by government regulation, new homes and commercial
properties can only be built subject to being below maximum carbon emission standards. This, in turn,
could considerably affect the cost or sale price of such properties in the market and become a significant
new factor affecting market demand (Pitt & Sherry 2016). A further issue with the construction industry is
the impact of the Grenfell Tower fire. Buildings containing combustible cladding are no longer insurable.
Building regulations have been developed to audit the use of this type of cladding in existing buildings and
bans have been put in place for new constructions. These external factors have significant impact on the
entire industry from manufacturers to architects, engineers as well as consumers (Create 2019).
In the remote industry environment analysis it is vital to consider all factors within the industry that affect
profitability and the competitive position of organisations within it. There is no question that new business
models resulting from new technologies and applications are changing many industries. Consideration of
the ‘industry’ includes not only the organisation and its competitors, but also their buyers and suppliers,
substitutes, potential new entrants and many other aspects as shown in figure 2.22.

FUTURE EXPECTATIONS
While most of the analysis to date has focused on historical trends, sometimes history does not provide
insights into future performance or trends. When conducting the remote environment and industry
analysis, consideration of how trends and external factors have developed will assist in hypothesising
what might happen in the future. It is essential to strategy development that future growth, profitability
and opportunities can be anticipated or, at the least, estimated based on past experience and data.
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 FIGURE 2.22 The remote and industry environments

External environment

Define industry

Remote environment Industry environment

• Social • History
• Technological • Markets
• Environmental • New entrants
• Ethical • Suppliers
• Political • Buyers
• Legal • Industry rivalry
• Economic • Substitutes
• Governments
• Life cycle
• Suppliers’ suppliers
• Buyers’ buyers
• Competitors
• Strategic groups
• Customers

Source: CPA Australia 2020.

Although it cannot always occur, the more information available about the history of the industry, and
the more that is known about developing trends and technologies, the more anticipation and foresight the
organisation will hold. This can place the organisation at an advantage when it comes to planning its future
strategy. Any discrepancies between what has been predicted and what actually occurs should be mitigated
by plans already in place. The risk of predicting future expectations and growth is thereby reduced by the
organisation’s planned ability to quickly and effectively redirect the strategy in line with the actual industry
trend. It is for this reason that managers and leaders need to be open to challenging the status quo and acting
on, or having contingencies to act on, the insights gained through external analysis

REMOTE ENVIRONMENT ANALYSIS PROCESS

Understanding how an industry has evolved to its current state and being able to explain how it has changed
over time is important. This helps the organisation to anticipate changes that are likely to happen in the
future, including the size and nature of future growth opportunities that exist in the industry. A strong
growth rate in the future provides opportunities for many organisations to do well, whereas a negative
growth rate would mean that growth can only occur for a few organisations at the expense of others.
The time frame for future growth is an important factor for consideration. This can vary from as little as
two years to as long as 20 years. The important thing is that the time frame of analysis should be consistent
with the definition of ‘long term’ for the particular industry. Typical organisations now consider three to
five years as their ‘long term’, but this varies from two years in high-tech industries to 10 to 20 years in
industries such as forestry, education and biotechnology.
Another important factor to consider, and agree upon, is the ‘average’ growth for a particular industry.
Most industry growth is a combination of:
• population growth
• price inflation (selling the same volume of goods at higher prices).
Another factor to consider is the likelihood of a disruptive technology impacting on the industry. This is
typically difficult to predict, which makes a careful analysis of the external environment more important
than ever.
Factors Influencing Growth
A number of factors shape and influence how industries evolve, and they can be broadly grouped under
the following areas:
• social
• technological
• economic
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100 Global Strategy and Leadership

• environmental
• political
• legal
• ethical.
Industry analysis was conventionally performed using the PEST (Political, Economic, Social and
Technology) framework, but this approach has evolved to reflect changes in the business environment,
first to PESTEL (adding environment and legal issues) and more recently to STEEPLE (adding ‘ethical’
forces). STEEPLE analysis provides a contemporary analysis tool (see figure 2.23).

FIGURE 2.23 STEEPLE — factors influencing industry growth

Ethical

• Adhering to industry
regulations Social
• Acceptable internal
conditions and • Trends in customer base
behaviours and behaviour
• Safe products • General social trends
Technological
• Processes and
technologies
• Level of infrastructure
• Waste utilisation
• New technology
and recycling

Legal Economic
Industry
• Regulations • National factors
• Changing laws and • State factors
frameworks affecting • Regional factors
industry • Industry factors

Political Environmental

• National government • Impacts of the

• State government environment on the
• Local government industry
• Governing bodies
• Lobby groups/interest
groups
• Organisational politics

Source: CPA Australia 2020.

A STEEPLE analysis provides an approach to consider and identify the key drivers of historical and
future growth in an efficient and systematic way. The framework can assist in gaining a greater knowledge
of an industry, which in turn helps us be more specific in identifying factors that have affected growth to
date and those that are likely to affect future growth. It considers the macro-environment of an industry —
those uncontrollable factors that influence industry growth. It also allows an organisation to make strategic
decisions while mitigating some of the risks identified in STEEPLE. An analysis of the factors can help
identify current and future trends while recognising areas of possible instability or unrest. These findings
are critical to strategy and decision making in order to place the organisation in the best position to play
the external factors to their highest benefit.
By summarising these findings, it becomes clear what patterns are forming and what implications these
may have. Following this analysis, strategic decision-makers are able to assess the effect of each individual
force, the likelihood of change and the strength of impact it will have on the organisation. This information
can guide strategic managers to make plans and direct the company in a way that considers the most
relevant, likely and highly detrimental forces.
When investigating these factors, two questions should be considered.
1. How has this particular factor contributed to shaping the industry into its current state (e.g. what has
been its impact on historical industry growth)?
2. Will this change in the future and if so, what impact will the factor have on industry growth in the future?
Table 2.3 provides a template that you can use to undertake remote environment analysis. For each
factor, you are expected to consider issues within that factor that have affected or will affect the industry in
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the future. You also need to consider whether the effect of that issue and the factor on the industry growth
will be positive, neutral or negative.
This component analysis is about the industry and understanding the context in which the organi-
sation operates. How the organisation is positioned and can position itself within that industry will be
addressed later.
The following sections discuss each of the trends or factors identified here and also provide examples
of how these affect various industries.

TABLE 2.3 Remote environment analysis worksheet

Issues, insights and patterns likely to

Factor affect the industry Overall effect on industry growth (+, =, –)

Social

Technological

Environmental

Economic

Political

Legal

Ethical

Source: CPA Australia 2020.

Social Factors
Changes in society are a combination of changes in demographic and sociographic factors. Demographics
are the easiest to measure yet are often overlooked in strategic analysis. Organisations tend to assume that
their industry will simply grow each year. Earlier in this section it was mentioned that most industry
growth is a combination of population growth and price inflation. Therefore, a key driver of growth
in most industries is population increase. In most developed countries, population growth is very low
(0–2% per annum) and some countries, such as Italy, project substantial negative population growth for
the foreseeable future. On the other hand, in most Asian, African and South American countries, population
growth is projected to be quite high (4% per annum or higher).
In terms of their impact on the growth of different industries, consider the following predictions that the
ABS (2018) has made about the Australian population.
• Australia is experiencing an ageing of its population. The median age is expected to increase from 37.2
years as at June 2017 to between 39.5 and 43.0 years in 2066.
• The number of people over 65 expected to grow from 15% to between 21 and 23% of the total population,
while the number of people over 85 is expected to double within 20 years, and double again in the next
20 to account for 4.4% of the population.
• The number of lone-person households is projected to increase to between 24 and 27% by 2041.
• By 2041, the average household size in Australia is projected to be between 2.6 and 2.7 persons which
is equivalent to the findings in 2016.
• Australia’s population is projected to grow by 40% by 2041. The population is projected at grow from
24.2 to 34 million.
Growth in the general population may not translate to growth in the specific population for a particular
industry. For instance, a reducing birth rate and immigration program will result in less demand for
primary schools (and eventually high schools and universities) and products associated with children.
On the other hand, in most countries the number of elderly people is rapidly expanding as life expectancy
increases. This implies higher growth rates for hospitals, retirement villages and medical industries, to
name just a few.
Much of the demographic data needed for this area of analysis is readily available, so its influence, if it is
important for an industry, should be quite predictable. It then needs to be put into the context of an industry
to understand its implications. For the government, the ageing population in Australia is a major concern
in terms of being able to contain the cost of healthcare services. Over 30% of health services revenue in
Australia were for people aged over 65, which is not proportional to this group’s 15% representation in
Australia’s population (IBISWorld 2019). This also impacts Australia’s revenue base as having a higher
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102 Global Strategy and Leadership

percentage of population retired or working less and paying less tax means the government then has less
income with which to support the ageing population.
The ageing population continues to rise, and is significantly increasing demand for pharmaceuticals
and health services in an attempt to cure degenerative diseases such as cancer, cardiovascular and
neurodegenerative conditions. This prediction, combined with an increasing average price of prescrip-
tions, points to the urgent need for the federal government to develop strategies that contain these
increasing costs.
Sociocultural trends change almost imperceptibly, so they are often difficult to capture in strategic
analysis. Nevertheless, identifying trends and understanding new attitudes is important for being able to
adapt for future success. Technology has made it easier than ever before to communicate with stakeholders
and monitor and analyse sociocultural attitudes, behaviours and trends.
Cultural issues reflect the fact that, as a society becomes more multicultural and more open to external
influences through global communications, assumptions about what is ‘normal’ or ‘acceptable’ become
less clear. For instance, previously it was assumed that food was specific to one area or country. Yet,
Western fast-food chains have been quite successful in penetrating parts of the developed and developing
world. Simultaneously, ‘exotic’ foods from regions as far apart as Thailand, Mexico, Morocco and
Korea are increasingly popular in developed economies as consumers seek variety. Cultural awareness
is a key success factor in successful leadership particularly when working in multinational and global
organisations. Cultural differences can impact on many aspects of society from values and beliefs to tastes
and even behaviour.
One of the most significant social trends, like many of the other factors being examined, has largely
been brought about through technology. Access to information at your fingertips in real time means
that consumers are more informed (or misinformed) than ever before. As such their expectations of
organisations, their behaviours and service provided is high, and organisations that do not meet these
expectations are held to account, often on a global scale. Some of the key social trends for 2019 included
online network communication — through gaming, and so on. This creates a powerful tool to organisations
to specifically target niche groups, their thought leaders and followers. The ‘me-too’ movement and the
reciprocal issue of ‘toxic masculinity’ continues to grow. Organisations ignoring these platforms may be
targeted by powerful lobby groups — think ‘mad witches’ and their continuous targeting of Alan Jones,
his radio network and advertisers in the wake of his comments about Jacinda Ardern. Individual members
from this social media activist organisation called, emailed and direct messaged companies to encourage
them to stop advertising with 2GB, specifically during Alan Jones’ program, and compiled a list of those
that were still in with Jones and those that were out. This resulted in significant revenue losses for 2GB.
‘Authenticity’ is the key. This is largely a backlash to ‘fake news’ and sees consumers wanted more real-
time responses to individual concerns and issues and less curated content. Artificial intelligence is creating
changes in both industries and social behaviour. Finding, using and sharing information is becoming more
simple and intuitive, meaning that even the most un-tech-savvy consumers can now be involved. This will
not only open up new industries and growth in existing industries but also change consumer expectations
regarding ease of access to information and resources. Artificial intelligence influencers are characters who
are developed with personalities, values and storylines. The possibilities for organisations to build brand
value and loyalty with this technology are endless. How can we forget Greta Thunberg? Her influence on
the youth of today and the importance of taking action on climate continue to influence social behaviour
and expectations globally.
The effective use of technology and social analytics enables organisations to communicate with their
stakeholders, involve them in decision making, respond to their feedback and customise their products and
services to satisfy individual needs. This will help build loyalty and a sustainable competitive advantage.

QUESTION 2.7

Use the reading from example 2.5 and the worksheet from table 2.3 to answer the following
questions on the accounting services industry in Australia. Some issues for consideration are listed
in the following box.
1. Explain the key social issues that have affected the growth of the accounting services industry
to date.
2. Examine the social issues that will affect the future growth of the industry.

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 ISSUES FOR CONSIDERATION

Issues for Consideration Under Social Factors

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• How is the population profile changing?
• How is the profile of work changing (e.g. part-time, full-time, contract, male and female participation)?
• How is the cultural profile changing?
• How are families changing (e.g. marriage, divorce, age of having children)?
• How is the education profile changing?
• What are the key social trends and issues (e.g. security, work–life balance, eating out)?
• What key behavioural trends are emerging (e.g. recycling)?
• Has technology impacted on the collection of social information or its effect on the industry?

Technological Factors
Technology is one of the most significant factors for analysis as it potentially affects all the other factors
in your STEEPLE analysis. Organisations need to determine how to optimise the management of these
technologies in order to create value and ultimately future proof themselves and their industry. Figure 2.24
provides a brief overview of nine key technology trends that have evolved over the past decade and three
emerging technologies that may shape the future.
These technological developments have influenced the globalisation of markets, the introduction of
new products, markets and services, and increased competition through online stores. It is unclear how
quickly this globalisation would have been realised without technological advances. For example, the
power of specific and localised media companies is now greatly reduced because the global use of the
internet has led to a fragmentation of information sources. The internet has changed expectations about
access to real-time information and has totally disrupted the print-based newspaper industry and, as a
consequence, many businesses have either shut down or are losing money rapidly. Most revenue in this
industry is from advertising rather than from the purchase price of a newspaper. Losses for traditional print
media companies increased significantly when large portions of advertising moved to online providers.
This combined with declining circulation of physical newspapers, as people took their news from
other sources.
It is interesting to note the behavioural and organisational responses that competitors displayed during
this disruption, which took over 10 years to unfold. Senior managers often rejected the possibility that the
internet could devastate their industry and that consumers would be interested in reading online or from a
computer or tablet. They therefore avoided entering the online marketplace to minimise cannibalisation of
their own paper-based revenues. However as online suppliers had much lower cost-bases, they were able to
give away the news for ‘free’. This hit established media organisations quite hard. By the time they moved
to adopting the online forum, a paid subscription was not acceptable to the market. They then moved to a
‘freemium’ model, but continue to struggle for survival.
Not only is technology changing, but how people access and use it is also evolving. Previously, people
went to a specific location (e.g. desktop computer or monitoring station) that was physically connected
to IT infrastructure. Now, they have smartphones, wireless and near-field technology so they are able to
consume, create and transfer more data across a much wider range of activities.
Some organisations use technology in a supporting role to help streamline their operations. Others rely
on it to help them understand their customers better so they can design products and services to suit their
exact needs. For some organisations, technology is the main component of the products or services they
deliver — providing data and information services to customers in real time on tablets and smartphones.
New roles such as Chief Information Officers (CIOs) have evolved to revaluate how organisations manage
data, build partner ecosystems, train employees and generally manage information both internally and
externally. Competitors that fail to keep pace with these technologies run the risk of no longer being able
to compete with more nimble organisations.
An example of the specialised use of technology is linked to trading organisations in the finance industry.
High-frequency trading algorithms and ultra-fast internet connections are used to create and process trades
faster than other market participants are able to. Trading a fraction of a second earlier than competitors
enables companies to take advantage of price movements before anyone else. Some companies have gone
to great lengths to install their internet servers as close as possible to the servers at the securities exchanges
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104 Global Strategy and Leadership

so that the communication lines travel less distance. This, combined with specialist computer programs
designed by physicists and mathematicians, demonstrates technology’s role in creating a completely new
form of competition in the finance industry.

FIGURE 2.24 Technological forces that impact on global industries

• Focus on experience. Technology has driven a shift away from traditional marketing towards the creation of
human-centric digital experiences that are sensitive and responsive to each individual.

• Analytics. Advances in data generation, capture, storage and analysis provide decision makers with
unprecedented insights into their organisation, their customers and their industry. Trust and ethics have
emerged as key challenges in the use of analytics.

• Cloud computing. There has been an overwhelming migration away from in-house IT towards cloud services,
and consequently a reimagining of the role of IT in the organisation.

• Convergence of business and IT. Technology and strategy are increasingly integrated, with technology
supporting agile business approaches, responsiveness and value creation through collaborative approaches
with customers and business partners.

• Risk. Technology has greatly expanded the scope of risk management beyond regulatory, operational and
financial risks to disruption, reputation, culture, ethics and relationship risks.

• Modernising core technology. The speed of change in the capabilities of technology and the speed of
innovation in how those capabilities are used in business has driven ongoing business investment in core
technologies.

• Augmented and virtual reality. Augmented and virtual reality technology, while still emerging, is extending
human-centric experience further — allowing people to move beyond keyboards and screens into new forms
of hyper-engagement and hyper-immersion.

• Cognitive computing. Advances in machine learning, automation and artificial intelligence are increasingly
enabling computers to engage in human-like communication and decision making, but with the advantage of
computer precision and speed.

• Blockchain. The potential for blockchain technology to establish security and trust on a distributed network
has been prioritised as a critical area for exploration by the majority of large businesses. It is seen as one of
the most potentially transformative technologies of recent years.

• Ambient experience. Building on the increasing focus on experience (see above), ambient experience
describes an emerging future where technology is fully integrated into the environment and human-
technology interaction is natural, constant and organic.

• Exponential intelligence. Building on analytics, cognitive computing and other advances, exponential
intelligence refers to a future in which technology can learn, discover and interact far beyond adherence to
programmed rules — to recognise and adapt to changeable human needs.

• Quantum computing. The development of quantum computing promises a future with vastly superior
processing capabilities where technological limitations cease to exist — technology applications become
limited only be human ideas, innovation and ingenuity.

Source: Developed from ideas in Deloitte Insights, 2020, ‘Tech Trends 2020’, www2.deloitte.com/content/dam/insights/us/
articles/techtrends-2020/DI_TechTrends2020.pdf; B Briggs, S Buchholz & SK Sharma, 2019, ‘Macro technology forces at work’,
Deloitte, 16 January, www2.deloitte.com/us/en/insights/focus/tech-trends/2019/macro-technology-trends-forces-at-work.html.

Digital twins are allowing organisations to use sophisticated modelling and simulations that are more
detailed and dynamic than ever before to optimise processes, products or services. To date, digital twins
have been used to increase efficiency in manufacturing, supply chain, predictive field maintenance, traffic
congestion and remediation. The limits to the use of this technology are as yet unknown.
‘Affective computing’ or ‘emotion AI’ are changing the way technology is experienced. These platforms
combine AI, human-centred design techniques and even technologies currently being used in neurological
research to enable organisations to ‘understand’ a human’s emotional state and the context behind it
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and can therefore respond appropriately. The opportunities for organisations to utilise these benefits are
also endless.
A recent realisation is that for every aspect that is disrupted by technology, organisations have an
opportunity to build (or lose) trust. Even ‘ethical technology’ is being incorporated into organisation to
help employees understand company values and expectations and recognise ethical dilemmas in decision
making. These initiatives are helping to demonstrate an organisations commitment to ‘doing the right
thing’ and builds trust with its stakeholders.
As technology management has now become a key part of corporate strategy, it is essential that IT and
finance leaders work together to optimise strategic outcomes. IT will need the support of finance to build
capabilities in digital architecture and beyond, support innovation, defend against disruption and enable
digital transformation. Organisations that understand the importance of building capabilities to support
technology and innovation across many platforms will be the first to realise the benefits and competitive
advantage that embracing new technologies can bring. Leading organisations have disciplined, measured
innovation programs that align innovation with business strategy.

QUESTION 2.8

Use the reading from example 2.5 and the worksheet from table 2.3 to answer the following
questions on the accounting services industry in Australia. Some issues for consideration are listed
in the following box.
1. Explain the key technological issues that have affected the growth of the Australian accounting
services industry to date.
2. Examine the technological issues that will affect the future growth of the industry.

ISSUES FOR CONSIDERATION

Issues for Consideration in Technology

Hint: Not all issues or questions may be relevant to your analysis, and you may think of additional issues
or questions that are industry specific.
• How dependent is the industry on technology?
• Will technological changes in the industry change the way it works with, for example, customers,
suppliers and employees?
• Is technology changing distribution for the industry’s products and services? Think about storage,
transport, distribution, the internet, online banking, new medicines or treatments, and new plant and
crop breeds.
• Is technology affecting the frequency or speed with which the industry has to change your products
and services?
• Is technology reducing the industry’s costs of production? Will it make what is sold cheaper and
therefore available to a larger consumer market?
• Will technological breakthroughs render what the industry does obsolete or change the way the
industry operates?

Economic Factors
The growth or decline of the general economy can significantly affect an industry’s growth. Some of the
economic factors that could affect an industry include changes in gross domestic product (GDP), inflation
rates, unemployment levels, interest rates, exchange rates, taxation rates and wage rates. These indicators
are broad and, where possible, it is preferable to identify more specific indicators that link directly to the
industry under analysis. For example, interest rates would be a more specific indicator for the housing
and construction industry and exchange rates would be closely monitored by companies that specialise in
importing goods.
One issue to consider at a macro level is that economies generally go through the ‘boom’ and ‘bust’
of business cycles. There is often a desire to predict that what is currently occurring will continue, but
neither booms nor recessions last forever. For instance, if the economy has declined in the past year or two
because it is in recession, the probability is that a recovery will occur in the near future. Conversely, if the
economy is growing at 8% per annum, it would be unwise to assume such a growth rate can be sustained
over the next three to five years.
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106 Global Strategy and Leadership

 The ABS is the main source of economic statistics in Australia. It publishes data on a regular basis
about prices, wages, economic growth, trade, the labour market and investment. Its website (www.abs.
gov.au) provides access to its publications and data, free of charge, on the day of publication. The ‘Key
economic indicators, 2019’ page (ABS 2019) contains a one-page summary of the latest data. In addition,
government budget papers provide a huge amount of quality data and, importantly, predictions about future
growth. These predictions do not necessarily apply to any particular industry, but industry associations
often provide summaries of implications for specific industries.

QUESTION 2.9

Use the reading from example 2.5 and the worksheet from table 2.3 to answer the following
questions on the accounting services industry in Australia. Some issues for consideration are listed
in the following box.
1. Explain the key economic issues that have affected the growth of the accounting industry
to date.
2. Examine the economic issues that will affect the future growth of the industry.

ISSUES FOR CONSIDERATION

Issues for Consideration Under Economic Factors

Hint: Not all issues or questions may be relevant to your analysis, and you may think of additional issues
or questions that are industry specific.
• How reliant is the industry on overall economic growth and prosperity?
• How will changes in key economic indicators affect the industry (e.g. employment figures, inflation,
interest rates)?
• What impact does the economic climate have on finance availability for the industry? Consider this
issue in terms of both the industry’s ability to produce and the customer’s ability to buy.
• Are exchange rates making imports or exports more attractive/less attractive? Does this apply to all
trading partners?
• How will rising or declining consumer spending affect the industry?
• What are the trends in terms of labour costs relative to other countries with the same industry?
• Has technology impacted on the collection of economic information or its effect on the industry?

Environmental Factors
Growing concern about climate change and the detrimental effects that particular industries like mining,
forestry and oil have on the environment have all influenced the addition of environmental factors
in an external analysis. The negative image that is associated with producing these products and the
environmental effects that many other manufacturing processes are creating has led to the flourishing of
new industries such as renewable energy and ‘green’ biodegradable product substitutes. Climate change,
more variable and extreme weather patterns and natural disasters have changed the farming and tourism
industry, as seen by flooding in the high-density Australian farming areas of Queensland and Victoria and
the horrendous fire conditions experienced in summer 2019–20.
Our planet is plagued with environmental issues that are impacting on every individual, community,
organisation and country. The scale and complexity of these factors mean that they effect all industries
and required all organisations to consider the environmental impact that they make and to take action
to not only meet regulations and compliance needs but minimise their harm to the planet. Some of the
issues of primary concern for businesses include pollution, waste disposal, water quality and supply and
climate change.
Pollution is one of the most obvious and tangible environmental issues for an organisation to deal with.
Being responsible for polluting air or waterways will have a negative impact on employees, consumers
and the community at large. All Australian manufacturers are subject to strict environmental regulations
regarding pollution. It is important to acknowledge though that not all countries have similar policies. It
then becomes an ethical issue for Australian organisations operating in these countries, whether to adhere
to the Australian standard of pollution guidelines or not.

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 Climate change is a much more intangible, as is evident by the constant debate playing out in the media
regarding this issue. It would be remiss of organisations to ignore the potential implications of climate
change on their operations and profitability.
Recent years have seen the exponential growth of the influence of environmental factors on organisations
and their stakeholders. The development of ‘green’ investments and investors and increasing legislation
that reflects changing social needs (e.g. recycling, water preservation and usage, energy efficiency and
waste management) are just two examples of this. As a consequence, many organisations are now
producing sustainability reports as a part of their annual reporting processes. These include information
on economic and community measures of performance rather than purely economic ones.
In addition to changing reporting to meet environmental expectations, organisations need to demonstrate
that they are taking action to improve environmental conditions (or at least do no harm). Business leaders
are expected to take action to mitigate environmental risks and actively promote responsible and sustainable
business practices. This focus has led retailers like Coles and Woolworths to act as key drivers in reducing
the use of plastic bags.
The fashion industry, not always known to be the most progressive, has seen some of the most significant
change in this area with large fashion houses finally stepping up and taking action to enact positive
change across the entire supply chain. Historically, the industry has been known for human rights abuses,
gender inequality and environmental degradation. For example, global textile production emits 1.2 billion
tonnes of greenhouses gases annually, more than international flights and maritime shipping combined
(Vogue 2019). In 2019, Stella McCartney launched the UN Sustainable Industry Charter for Climate.
Other signatories include Burberry, GAP, H&M, Kering, Levi’s and Inditex, who have all pledged a series
of industry wide commitments, including a target of 30% reduction in green house emission by 2030.
Other innovations in the industry include new fabrics such as spider silk and leather made from discarded
grapeskins to fabrics grown from bacteria. ‘Circular design’ has become a buzz word, which means that
the entire life cycle of the product needs to be considered at the design and sourcing stage. These initiatives
have also led to new industry segments with start-ups aiming to use all renewable energy, fair paid labour
and transparent supply chains and even entirely new industries in related areas such as fabric innovation,
recycling and disposal.
These initiatives are a win/win for the organisation as they not only represent responsible business
practices, but also offer opportunities for the organisation to improve productivity, reduce waste, and
improve profitability, as consumers align themselves (and their subsequent purchases) with organisations
who share their values and behaviours and have a strong positive environmental message.

QUESTION 2.10

Use the reading from example 2.5 and the worksheet from table 2.3 to answer the following
questions on the accounting services industry in Australia. Some issues for consideration are listed
in the following box.
1. Explain the key environmental issues that have affected the growth of the accounting industry
to date.
2. Examine the environmental issues that will affect the future growth of the industry.

ISSUES FOR CONSIDERATION

Issues for Consideration Under Environmental Factors

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• What are the key environmental issues that are affecting the industry?
• How are environmental considerations affecting the industry’s value chain — in terms of, for example,
supply sourcing, manufacturing and marketing?
• What legislation is in place or is likely to be implemented with regard to environmental issues?
• Does disposal of what the industry produces have environmental implications?
• Is recycling an option for the industry?
• Is the industry reliant on resources that contribute to environmental problems?
• Are there factors which may impact on the sustainability of the industry into the future?
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108 Global Strategy and Leadership

Political Factors
Industries in many countries are often affected by political influence and government legislation. In the
STEEPLE model (figure 2.23) we identified legal issues as an independent factor, but they are usually very
closely linked to political factors. For example, the issue of reduction in trade barriers due to encouragement
by the World Trade Organization is a political trend that has to be recognised by many industries. This issue
is not directed at any particular industry, yet it is having profound effects on various industries in many
countries. This issue is also one that is often covered by legislation.
Most political changes result from changes in the economy or in social and cultural shifts. Thus, although
tax rates are generally decided by politicians, tax decisions take into account economic considerations such
as the state of the economy. Technological change also affects political decisions. Technology has made
cross-border purchases much more common with online shopping accounting for 10% of Australian retail
sales, with the result that even small businesses can now serve a global market. Politicians are still coming
to grips with the tax issues involved. As discussed earlier, the retail industry is currently feeling the pressure
from this with major receiverships and closures of many brick and mortar stores as previously discussed.

QUESTION 2.11

Use the reading from example 2.5 and the worksheet from table 2.3 to answer the following
questions on the accounting services industry in Australia. Some issues for consideration are listed
in the following box.
1. Explain the key political issues that have affected the growth of the accounting industry.
2. Examine the political issues that will affect the future growth of the industry.

ISSUES FOR CONSIDERATION

Issues for Consideration Under Political Factors

Hint: Not all issues or questions may be relevant to your analysis, and you may think of additional issues
or questions that are industry specific.
• How reliant is the industry on government or other policy makers for future growth?
• What has been or what will be the extent of the impact of political factors on the industry?
• What key legislative changes are under review?
• Will changes in tax policy affect the industry (more than any other industry) such as R&D tax
concessions?
• What are the steps that the government is likely to take in relation to tariffs and international trade
in general?
• If a new government came into power, what changes might affect the industry?
• How could political changes in countries that are your suppliers/buyers affect the industry?
• Does your industry receive any rebates or subsidies, and will this continue?
• How might competition policy influence the industry?
• Has technology impacted on the collection of political information or its effect on the industry?

Legal Factors
Similarly, legal drivers have become prominent in characterising industry conditions and affecting growth,
whether it is negative or positive. Not only are local and national laws relevant, but international law and
customs now affect most industries. Multinational companies working on a global scale must consider
the local laws of their multiple operating locations in conjunction with the regulations of working cross-
regionally. Legal regulations are increasing, and the consequences are significant for affected industries.
In Australia, the tobacco industry has been significantly affected over the past two decades, most recently
in 2012 by the introduction of new regulations banning labelled packaging. Globalisation means that
international laws and treaties need to be observed in conjunction with the local laws of the country in
which the organisation operates.
Regulation and compliance can increase the costs and complexity of doing business. Changes in this
area are often in response to public opinion and the organisation’s goal of reducing the risks associated with
claims for malpractice. It can also serve to protect an industry and define its terms and conditions of trade.
An example is what’s happening with the increase in scrutiny and focus on the audit profession. Audit
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companies are seeing an increase in review from external regulators such as ASIC and the PCAOB (the
US regulator), which in turn is resulting in audit firms issuing transparency reports to the market/public
and investing more in audit quality. The recent Royal Commission into the banking sector also resulted in
increased regulations around lending applications, etc that will have ongoing impacts on the banking and
finance industry.
Governments influence business not only through legislation but also through government agencies
and administrative regulation. For instance, the Australian Competition and Consumer Commission
(ACCC) closely monitors industry practices that might lead to substantially reducing competition among
organisations. This has resulted in significant changes in many industry structures and practices, as well as
preventing a number of planned industry consolidations that, in the ACCC’s opinion, would have reduced
competition and thereby disadvantaged consumers.
Apart from specific legislation that derives from political influences, developments in the legal system
itself can also have an important influence on an industry. For instance, the increased willingness of
courts to award damages against professionals for malpractice has led directly to professionals opting
for corporate structures that provide limited liability as opposed to partnership structures with unlimited
personal liability. The introduction of US-style class action lawsuits in Australia and other countries has
made it easier for individuals to pursue actions against organisations, particularly those in the consumer
products area. For example, lawsuits relating to asbestos, utility-supply interruption and food poisoning
have had a major impact on the operations of many industries. Interestingly, new disruptive models are
also attracting substantial legal action due to their transformation of many industries. The introduction of
the ride-share model in the transport industry, has seen substantial legal implications in Australia. Initially,
legislation was slow to respond to the disruption that the service caused. The system was initially deemed
illegal as privately- owned vehicles were being used for business purposes. However, technology used by
Uber made it difficult to police these laws and by 2017, Uber was legal in every state. New South Wales
were the first to offer a compensation package to taxi-plate holders who had suffered financial losses.
This was later rolled out across other states (ABC News 2019). A recent Australian ruling found that Uber
drivers are not employees, and therefore are not entitled to minimum wage laws, holiday pay and so on.
This was contrary to a similar ruling in the UK that found that they were in fact employees of Uber. This
paves the way for Uber to appeal the UK ruling (Financial Times 2019). This ruling does not necessarily
refer to all ‘gig-economy’ situations and Australia is liked to see more court cases related to this as this
industry expands.

QUESTION 2.12

Use the reading from example 2.5 and the worksheet from table 2.3 to answer the following
questions on the accounting services industry in Australia. Some issues for consideration are listed
in the following box.
1. Explain the key legal issues that have affected the growth of the accounting services industry
to date.
2. Examine the legal issues that will affect the future growth of the industry.

ISSUES FOR CONSIDERATION

Issues for Consideration Under Legal Factors

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• How does legislation (e.g. employment, intellectual property, environmental, health and safety law) affect
the industry?
• Does existing legislation protect the industry from competition? Is this likely to change?
• Does existing legislation restrict ownership in the industry and how likely is this to change?
• Is anything that the industry does or produces likely to be banned?
• Are there any class actions for the industry, based on what it has done in the past?
• Has technology impacted on the collection of legal information or its effect on the industry?

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110 Global Strategy and Leadership

Ethical Factors
Ethical considerations are one of the most recent additions to the external analysis. They impact on
all processes and actions that influence the behaviour or management and employees both within the
organisation and with external stakeholders such as customers, suppliers and competitors. In a world where
consumers and stakeholders have greater access to information about organisations than ever before (and
vice versa), there are much higher expectations on organisations to behave responsibly both internally and
externally. This has many implications for organisations and their strategic decisions.
When assessing the external environment, organisations need to consider any processes and actions
that may impact on the organisation’s ability to conduct its practices in an ethically acceptable manner.
Things to consider include the working conditions and wages of suppliers, the safety standards within the
industry and its suppliers, the emissions, waste, bi-products or side effects of the industry and its suppliers
and how ethical the products and services provided actually are. These considerations may have significant
implications for organisations and their strategic decisions. Think of the problems faced by companies like
Nike when they were found to be using sweatshops in Asia to make their products. Once exposed, they
were forced to change their manufacturing and operating processes to address the issue. More recently
Volkswagen were caught out in regard to their emissions calculations. This led to US$2.8 billion worth of
fines imposed in the United States alone.
The 2008 financial crisis highlighted unethical business practices. The results were felt around the world,
with some economies still in recovery. This event had knock on effects to regulations across a number of
industries and social expectations, with organisations now expected to behave in ways that have no negative
influence on their employees, the community or society as a whole. One example in the accounting services
industry is the introduction of mandatory audit firm rotation and restrictions on other services which has
now been implemented in Europe.
Finance leaders and managers are expected to balance, protect and preserve all stakeholder interests. As
such, they are tasked not only with acting with personal integrity, but also providing accurate, objective
and meaningful information, disclosure and transparency, secure handling of sensitive information and
confidentiality as well as compliance with any relevant rules and regulations. In an organisational context it
is important that individual ethical behaviours are not compromised by unethical practices. If for example,
organisations reward finance managers for making decisions that benefit the company rather than the
customers or other stakeholders, this could create an ethical dilemma. Navigating these ethical minefields
are now an important skill for leaders to develop.

QUESTION 2.13

Use the reading from example 2.5 and the worksheet from table 2.3 to answer the following
questions on the accounting services industry in Australia. Some issues for consideration are listed
in the following box.
1. Explain the key ethical issues that have affected the growth of the accounting services industry
to date.
2. Examine the ethical issues that will affect the future growth of the industry.

ISSUES FOR CONSIDERATION

Issues for Consideration Under Ethical Factors

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• Does the industry adhere to compliance and regulations?
• Is communication truthful and transparent to all stakeholders?
• Does the industry have safe work conditions, avoiding processes and technologies that harm employees
or the public?
• Is performance prioritised over employee/stakeholder well-being?
• Are all stakeholders in the supply chain held to the same ethical standards?
• Has technology impacted on the collection of ethical information or its effect on the industry?

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Summarising the Remote Environment Analysis
By working systematically through each of the remote environment elements you should have a compre-
hensive list of factors that have shaped the historical growth of the industry and are likely to affect the future
growth of the industry. This now needs to be summarised to capture the key factors. This is a difficult
(and often subjective) task because the issues cannot easily be ‘added’ or even compared. Example 2.3
provides an example. The following can be used as a guide to developing an environmental analysis
summary.
1. Assess each issue you have identified and retain those you have identified as having a significant positive
(+), neutral (=) or significant negative (–) impact on the growth of the industry as compared with the
average growth of industries in general. For instance, if the ‘average’ industry growth is expected to
be 3% per annum over the next three to five years, and a particular factor in the industry that is being
examined is expected to make it grow faster than this average rate, assess the factor as (+).
2. Summarise each (+) and (–). You should give due consideration to the relative importance of each
factor. For instance, there may be an equal number of (+)s and (–)s, but if all the major factors are
(+), the conclusion would be that the industry would be expected to grow faster than average. Different
factors will have different weightings so it is not a matter of simply adding up all of the positives and
negatives and seeing which one has more. There may be many positive factors, but one negative factor
may outweigh all of those so you will need to use some professional judgement in coming up with your
overall conclusion.
3. Write down this summary, identifying the major reasons for your conclusion.
This summary analysis helps to integrate the factors that have the potential for industry growth. It also
assists in examining the information that is missing or is perceived to be important. Unless these steps are
followed, the analysis simply results in a long list of factors that cannot be easily understood by others.
From this analysis it should be possible to summarise the key factors in terms of importance and the
extent of the impact that these factors may have on future industry growth. This will help you to conclude
whether the industry you are analysing is likely to grow at:
• faster than average rates (+)
• average rates (=) or
• slower than average rates (–).
Within each factor there are likely to be a mixture of positive and negative issues that will impact on
future growth. Not all factors are equal, so simply ‘adding’ all the pluses and minuses is not a foolproof
way of arriving at a conclusion — you must use your judgement.
Some factors will have a greater impact than others, so you need to take an overall position for each
of the factors and then develop an overall position for the industry once all the factors are put together.
Generally, however, where there are more positive factors than negative factors, growth is likely to be
positive in the future and vice versa. It is always useful to add a statement of just how strong positive
or negative growth will be (i.e. lower than average, about average or greater than average if positive, or
perhaps slightly negative to strongly negative).
You should be able to support your conclusion, drawing from the analysis you have completed using
the STEEPLE framework and from analysis of the key industry data.
The purpose of the analysis is to understand whether the industry is attractive for future investment, or
if new competitors will enter because growth is more attractive or exit where it is not. The answers to these
questions, and many others, are important in making strategic decisions about what to do — something
we look at again in module 5 where we explore options and decision making frameworks.
Example 2.6 provides a remote environment summary for the luxury goods industry (retailing).

EXAMPLE 2.6

Remote Environment Summary for the Luxury Goods Industry

Luxury goods are those traditionally associated with affluence, quality, reputation and exclusivity. Though
these goods are inessential, they are made desirable by the exclusivity of the product and the image
it portrays. The luxury goods market operates over a number of industries, including clothing, footwear,
fashion accessories, automobiles, alcohol, cosmetics, watches and jewellery. They are high tiered in terms
of both price and quality.
According to a report by Bain & Company (2016), the global personal luxury goods industry in 2016
will mirror the low, single-digit real growth of 2015, even as internal market dynamics are reshuffled by

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112 Global Strategy and Leadership

 geopolitical turmoil and luxury brands’ emerging strategies. Despite initial growth in 2012, after the GFC,
the industry has since declined. The year 2015 marked the beginning of a new era of slower but steady
growth globally for the industry — which includes leather accessories, fashion, hard luxury, and fragrance
and cosmetics — and reached EUR253 billion in revenue. This was up 1% in real growth terms. Decreased
tourism across Europe and a slow holiday season in the United States, instability in the Middle East and
a downturn in China are all suggested as causes for this decline. According to Bain & Company (2016),
the 2015 slowdown seeped into the first quarter of 2016 with only 1% growth — a trend that is expected
to continue.
‘The luxury goods industry is stuck in a holding pattern for the foreseeable future,’ said Claudia
D’Arpizio, a Bain partner and lead author of the study. ‘All eyes are again on Mainland China, which
is the key to unlock recovery around the world, and the United States, where local consumption is failing
to offset decreased tourism. Consumers’ changing purchase patterns, including a reshuffling of tourism
and revitalised local spending in Europe, will likely do little to drive luxury brand growth much beyond the
low single digits’ (Bain & Company 2016).
This recent decline in growth rate in the luxury goods industry can be used as a key example of how
the remote environment has impacted on the industry, and how this environment is likely to affect its
future growth.
Usually a remote environment summary only presents the analysis of these issues and their expected
effect on the industry. However, table 2.4 also indicates how a competitor in the luxury goods industry
may be directly affected by these factors’ influence on the growth of the industry.

TABLE 2.4 Remote environment of the luxury goods industry

What are the likely issues that have affected and will affect Effect on industry
Factor the global luxury goods industry? growth (+, = , –)

Political Breaking into new, developing markets is often problematic. For –

example, India has high restrictions on entry into its market, and
political instability.

Political Political unrest such as in the Middle East has been proposed –
as a cause for the decline in the industry.

Economic Luxury goods are tightly linked to economic conditions. The –

downturn in China is evidence of how economic conditions can
impact on a market.

Economic Brexit has led to reduced spending in this industry as –

disposable income is a key factor in the choice to purchase
luxury goods and has changed as a result of reduced
exchange rates.

Social Tourism has become increasingly intertwined with luxury goods –

spending. It accounts for 40% of sales in the luxury goods
industry. The slow US holiday season has been suggested as
a cause of decline in growth in the sector.

Social Tourism expands the market for luxury goods, with a focus on –
Chinese tourists with high disposable incomes. As noted this
market has experienced a downturn.

Technological E-commerce is growing at an average 14.6% per year. +

Technological The transformational shift towards online platforms has –

increased consumer choice and competition and the
emergence of pirated brands.

Environmental The issue of climate change has put the focus on negative –
environmental impact, especially consumption of unnecessary
goods. This can result in consumer boycotts of an organisa-
tion’s products as protest.

(continued)

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MODULE 2 Understanding the External Environment 113

 TABLE 2.4 (continued)

What are the likely issues that have affected and will affect Effect on industry
Factor the global luxury goods industry? growth (+, = , –)

Legal The expensive price tags associated with prestigious goods –

have led to the proliferation of counterfeit luxury products.
The market for fake products has expanded exponentially,
with China and other Asian countries responsible for a large
proportion of the production of counterfeits.

Ethical Manufacturing processes for many luxury goods including the =

sourcing of materials and working conditions may affect the
reputation of the brand.

Ethical Does sustainability align with the fundamental luxury =

characteristics of heritage, quality, longevity and timelessness?

Overall On the basis of this analysis, the future growth of the global –
luxury goods industry is predicted to decline slightly.
Key factors supporting this conclusion are:
• competition created by e-commerce providing easier access
to such products and counterfeits
• consumers’ disposable incomes are continuously decreasing
based on a downturn in large markets such as China
• slower tourism, especially in large markets such as the United
States and China
• a social backlash against consumerism and unsustainable
manufacturing practices.

Source: CPA Australia 2020.

QUESTION 2.14

For the remote environment analysis, you should have now considered each of the components of
the STEEPLE model (see questions 2.7 to 2.13).
1. Bring this information together to form an overall summary as to what has shaped the global
accounting to date and what will affect its future growth.
Then respond to the following questions based on your analysis.
2. Explain the major issues you think will influence the future of the accounting services industry.
3. Considering all the issues together, examine whether the industry likely to experience positive,
neutral or negative growth in the future.
4. Examine the implications for an organisation within this industry based on your assessed level
of growth.

The key points covered in section 2.3 of this module, and the learning objectives they align to, are
as follows.

KEY POINTS

2.1 Select the key concepts, factors and frameworks that relate to understanding the influence of
the external environment on organisational strategy.
• The remote environment analysis process uses a STEEPLE analysis (or a variation such as PEST
or PESTEL).
• A STEEPLE analysis provides an efficient and systematic way to consider the key drivers of
historical and future growth.

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114 Global Strategy and Leadership

 2.2 Evaluate the key factors related to external environment that impact growth, profitability
and competition.
• The remote environment includes general influences that are out of an organisation’s control and
may relate to social, technological, environmental, economic, political, legal and ethical factors.
These factors influence all industries, but the remote environment analysis focuses on how they
affect the growth of the organisation’s specific industry.

2.4 INDUSTRY ENVIRONMENT ANALYSIS —

INDUSTRY PROFITABILITY
Once the remote environment has been analysed to determine the current situation and future growth
potential of the industry, the second stage of external environment analysis is to analyse the industry in
order to determine profitability. The aim of industry analysis is to answer the following questions.
• What are the forces within the industry that determine the profitability of the industry?
• Based on these forces, what is the current and expected future profitability of the industry?
• How are the forces changing and how are they expected to change over time?
Michael Porter developed a technique for analysing forces that affect industry profitability. Known
as the ‘five forces model’, it is analytically superior to the conventional idea of considering only the
organisation’s competitive position. The position of competitors is only one of the five elements in Porter’s
model. (Porter [1980] terms this element ‘industry rivalry’.) Five forces analysis is designed to explain why
certain industries are more profitable than others. Porter (1980) found that, by analysing these five forces,
consistent differences in industry profitability could be explained. The five forces are the:
1. threat of new entrants to the industry
2. power of suppliers to the industry
3. power of buyers from the industry
4. power of substitutes for the industry’s products and services
5. intensity of industry rivalry between competitors.
Although this model has been utilised for many years, the analysis remains relevant. As well as analysing
the level of current profitability, the five forces analysis should be used to understand the likely changes that
will occur in the industry and the expected level of future profitability that will flow from these changes. For
instance, an industry with many competitors and low profitability, but where the competitors are merging
or leaving the industry, is likely to become much more profitable in the medium term.
While not every factor of the five forces will be important in any particular industry, the lists developed
cover not only well-known economic factors, but also many factors that reflect the competitive behaviour,
psychological make-up and values of the organisations in the industry.
In general, the lower the impact of forces, the lower the level of industry rivalry (i.e. the level of
competition between industry participants) and the higher the level of profitability. Likewise, where forces
are assessed as high, there is generally a higher level of industry rivalry and a lower level of profitability.
While Porter’s is an essential theory in corporate strategy, it has not been unchallenged. Grant 2019
discusses some of the potential extensions to Porter’s analysis that may increase relevance for specific
industries. The first is to include ‘complements’. These have the opposite effect to ‘substitutes’ as rather
from detracting from, they add value to the industry. If complement power is high, they can devalue or
even commoditise your product or service. On the other hand, if you can own, control or support aspects
of the complementary products or service, lessening their power, you can take advantage of the growth
and profitability that they bring to the industry.
Example 2.7 examines the five forces and complements in relation to the online retail industry.

EXAMPLE 2.7

Industry Analysis and the Online Retail Industry

• Threat of new entrants is high. There is little expertise required to enter the online industry, low cost of
entry and easy access to products.
• Supplier power varies. Suppliers, if they have a product or design in high demand, have a number of
avenues to pursue, potentially driving the price up. However, the market is quite large, so entrants to
the industry have a wide range of suppliers to work with.
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 • Buyer power is high as buyers have alternative channels for the product, are easily able to compare
prices due to the availability of information on the internet, and can, with similar ease, locate the product
elsewhere.
• Substitute power is high as there are no geographic barriers on the internet, allowing international as
well as local outlets to offer their product to the buyer. A product that is designed and made locally can
be offered for a cheaper price internationally, yet delivered to the local region. Additionally, traditional
bricks-and-mortar stores are an alternative to online retailers.
• Complement power is moderate. There are a number of new finance methods available to retail
shoppers. These include AfterPay, ZipPay Splitit and Bundll. These platforms add options, safety
and convenience to customers and add value to the retail industry by encouraging more purchasing.
Organisations not taking advantage of these platforms may find that they are no longer preferred outlets
for their target market and may encourage them to switch to their competitors.
• Industry rivalry is high due to the demand for products, and the many competitors in the online retail
industry that do not operate from physical stores (e.g. ASOS, The Iconic). Price competitiveness drives
rivalry, and, due to the ease of comparing prices online, price competitiveness is high and therefore
industry rivalry is also high.
Source: Adapted from M Porter, 2001, ‘Strategy and the internet’, Harvard Business Review, March, pp. 63–7.

There are a number of conclusions that could be drawn from this analysis. Firstly, as all forces on the
industry are considered to be high, there is intense rivalry making it inherently an unattractive industry.
If you were looking at entering this industry, the decision would probably be no. If however you are
already involved in the industry there are a number of strategic options. As buyer power is high, with
many online retail options, objectives should be developed on ways to improve the customer experience
and build loyalty. Offering some of the complementation products, such as AfterPay, may be one method
of doing this. Threat of substitution is also high with virtually limitless options for consumers in regard to
sourcing products. One strategic option here it to either be involved in a number of alternate sources (for
example brick and mortar stores that also offer online retailing), or optimising your value chain to provide
the best variety at the lowest price to the most people. Amazon are currently managing this well, building
strong relationships with suppliers to offer a wide scope of products and keep prices low and strategically
positioning warehouses to offer transport costs. However, Amazon Australia is not doing quite as well as
its global counterparts. As a late entrant into the Australian market, it lacks the power over suppliers that
their parent company has, making it difficult to compete with other more established online retailers in
scope and price and has not yet found profitability (AFR, April 2019).
Each of the five forces, and complementary forces are now described in more depth.

PORTER’S FIVE FORCES

Threat of New Entrants to the Industry
‘Threat of new entrants’ relates to the likelihood of new firms entering the industry. If there is a significant
threat of new entrants, the profitability of the existing industry may be eroded because new firms will enter
the market and compete for available profits. Where it is easy for new competitors to enter the industry,
the threat of new entrants will be high. This is in contrast to situations where specific laws prevent new
competitors from entering, where patents exist in key industry products or technologies, or where there
are high barriers to entry, in which case the threat of new entrants will be low.
It is also important to take into account how significant a new entrant will be in this analysis. For example,
it may be easy for a company to enter the market as a very small or niche competitor, in which case this
will not have a high impact on overall industry competitiveness. However, if a major multinational enters
the industry and takes a significant amount of market share from existing competitors, this would be a high
force and would have a high impact on overall industry profitability.
‘New entrants to an industry’ refers to any threat to the current competitors’ ability to generate the
desired financial returns. Typically, a new entrant will need to capture market share and this could
be achieved through strategies such as price discounting, introducing new product features, improving
services and delivery, and introducing new technology. However, the number and profitability of new
entrants is often determined through consideration of barriers to entry to the industry.
Entry barriers make it difficult for a potential competitor to enter an industry. Some typical barriers to
entry are listed here.
• Industry size. Where the overall value or volume of the industry is small it may not be attractive to
new entrants as there is insufficient size to allow a new competitor to enter and gain market share from
existing competitors.
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116 Global Strategy and Leadership

• Economies of scale. The need for a large volume of production and sales to reach the cost level per
unit of production for profitability is a barrier to entry. High-volume competitors have the ability to
generate cost reductions through volume discounts from suppliers, efficient capacity utilisation and
learning effects that reduce labour costs. New entrants with little market share will not enjoy the cost
advantages of those already established competitors.
• Product differentiation. Industries dominated by branded products are difficult to enter due to the large
amount of time and money required to create a competing branded product. Well-established brand
names and trademarks make it difficult for a new entrant to establish brand awareness, secure shelf
space in retail outlets and thereby capture sales.
• Intellectual property. Patents and other types of proprietary intellectual property are very effective in
limiting industry entry.
• Capital requirements. A large capital investment per unit of output in facilities tends to limit industry
entry. Some industries require high capital investment to be able to deliver a product or service. For
example, this has proven to be a barrier to entry in industries such as airlines (due to the high cost of
planes) and pharmaceuticals (due to the high cost of R&D).
• Switching costs. The tendency for buyers of an industry’s products to be reticent about switching to a
new supplier tends to limit entry. In many cases, if customers have committed to the current competitors’
products, there are high costs of changing to alternatives. Examples include the installation of specific
software such as SAP or Windows, or obtaining a complete system from one supplier where after-sales
service is guaranteed, so changing components has implications other than cost.
• Access to distribution channels. New entrants may have difficulty distributing their goods and services
through established distribution channels as those have already been locked in by existing competitors.
Examples include exclusive distribution policies, such as KFC only having Pepsi soft drinks available
or the space allocation on supermarket shelves where well-known brands are given priority.
• Government policy. Governments may restrict new entrants through licensing restrictions and policies
such as limiting foreign investment. Industries where permits and licences are required to establish
production tend to have limited entry; for example, limited licences are issued in Australia in telecom-
munications, radio and TV broadcasting and taxis. Similarly, industries where rigid industry standards
exist tend to have limited entry.
When there is a disruption in an industry, it is usually because the new technology/product/service has
allowed the new entrant to by-pass one or all of these barriers. Consider Uber’s entrance into the taxi
industry. The licencing restrictions and costs associate with regulated taxi services were two of the key
barriers to entering the industry. Uber’s ride-share model meant that both of these barriers were by-passed,
and once legalised, allowed easy entry into this otherwise protected industry.

QUESTION 2.15

Use the reading from example 2.5 and your industry analysis to answer the following questions
on the accounting services industry in Australia. Some issues for consideration are listed in the
following box.
1. How would you describe the threat of new entrants to the accounting industry? Refer to the
issues listed in the box to structure your answer.
2. Provide reasons for your answers to question 1.

ISSUES FOR CONSIDERATION

Issues for Consideration on Threat of New Entrants

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• Is the industry large enough to be attractive to new entrants?
• Are economies of scale needed to be competitive in this industry?
• How much capital investment is required to set up?
• How easy or hard will it be for new entrants to get the appropriate qualifications?
• What government policy restrictions are there?
• How onerous is compliance in the industry?
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 • Are there proprietary product differences for existing products and services in the industry?
• How strong are the brands in the industry?
• How hard or easy is it for customers to switch their business between competitors in the industry?
• Does technology exist that will allow new players to bypass current barriers to entry?

POWER OF SUPPLIERS TO THE INDUSTRY

Suppliers are those organisations, groups or individuals that provide products or services to the industry.
They include raw material, labour and capital suppliers. If a type of supplier is particularly important to
the industry, it will have bargaining power over the industry, and this reduces the industry’s profitability.
When discussing suppliers and buyers in an industry, the term ‘concentration’ is important. It describes
whether there are many or few suppliers. With high concentration, there are very few suppliers so they
capture most industry revenues. In comparison, with low or diluted concentration there are many suppliers
who share a small amount of revenue.
A high concentration usually corresponds with high supplier power over industry participants. A low
concentration (i.e. a large number of small suppliers) means that buyers generally will have more choice
about whom to purchase from, which reduces supplier power and increases buyer power.
Suppliers can affect the returns to any competitors within an industry through their ability to raise prices
and determine quality. A supplier is powerful in the following circumstances.
1. The supplier industry is dominated by a few companies but sells to many customers such as in
supermarket retailing or chocolate confectionery manufacturing.
2. Its product or service is unique and the switching costs are high, such as software applications.
3. Substitutes are not readily available.
4. Suppliers are able to forward integrate — that is, to sell or distribute their products directly and compete
with their customers.
5. A purchasing industry only buys a small percentage of the supplier’s output and is therefore relatively
unimportant to the supplier.
Most of us can think of an example where price is not a consideration for something we really want,
and this value to us is often a function of how easy or hard something is to obtain.
In the agricultural industry there are many farmers (suppliers) compared to buyers, who can distribute
the product in retail outlets where consumers will buy them. So the farmers have low power, decreasing
their profitability. Conversely, a supplier with exclusive distribution for a desired product has high supplier
power, thereby increasing its profitability.
There are often several significant suppliers in an industry and in practice they should be assessed for
their relative impacts. This is also the case for buyers (see the ‘Power of buyers’ section below).

QUESTION 2.16

Use the reading from example 2.5 and your industry analysis to answer the following questions
on the accounting services industry in Australia. Some issues for consideration are listed in the
following box.
1. How would you describe the power of suppliers in the accounting services industry? Refer to
the issues listed in the box to structure your answer.
2. Provide reasons for your answer to question 1.

ISSUES FOR CONSIDERATION

Issues for Consideration on Power of Suppliers

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• What is the number and concentration of suppliers?
• How important are specific suppliers’ inputs?
• How likely are suppliers to forward integrate?
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118 Global Strategy and Leadership

 • How easily can organisations in the industry switch suppliers?
• What is the proportion of the cost of suppliers’ products relative to the total cost of the industry product
or service?
• Is information about suppliers’ products easily available?
• How profitable are the suppliers?
• Does technology exist that will impact on the power of the suppliers?

Power of Buyers
Buyers are the customers of the industry. If buyers are particularly important to the industry, they will have
power over the industry, thus tending to reduce the profitability of the industry. The bargaining power of
buyers is essentially the mirror image of the bargaining power of suppliers. This time the industry is the
supplier, not the buyer in the transaction.
Buyers (customers) affect the returns that competitors can expect in an industry by their bargaining
position relative to industry participants. They can force prices down, play off competition against each
other and bargain for better quality or service. The buyer is in a powerful bargaining position in the
following circumstances.
• A buyer purchases a large proportion of the seller’s product or service. An example would be car
manufacturers, which are dominant customers of a component manufacturer.
• A buyer has the potential to backward integrate, which means the ability to make or supply the supplier’s
product or service themselves. An example would be a paper mill which could own its own forest
plantations and therefore be able to produce its own raw materials.
• There are many alternative suppliers because the product is standard or a commodity.
• There are few costs of changing suppliers (switching costs). For example, office supplies outlets are
easy to find.
• The product or service is a high percentage of the buyer’s costs, in which case they are more likely to
negotiate for the best deal available and will have an incentive to ‘shop around’.
• The product or service is easily substituted for something else.
As an example of buyer power, if there are few supermarkets compared with food industry manufactur-
ers, supermarket buyers will have power over the industry (buyer concentration). Similarly, if supermarkets
are large purchasers from the industry, this will also give them power (buyer volume). If retailers are not
very profitable, they will bargain hard with manufacturers (buyer profitability).

QUESTION 2.17

Use the reading from example 2.5 and your industry analysis to answer the following questions
on the accounting services industry in Australia. Some issues for consideration are listed in the
following box.
1. How would you describe the power of buyers in the Australian accounting services industry?
Refer to the issues listed in the box to structure your answer.
2. Provide reasons for your answer to question 1.

ISSUES FOR CONSIDERATION

Issues for Consideration on Power of Buyers

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• How concentrated are the buyers in the industry?
• Is distribution controlled by a few important outlets?
• Are there alternative channels of distribution?
• What impact does the product or service being purchased by the buyer have on their business?
• How likely are buyers to backward integrate?
• How easy or difficult is it for buyers to switch to alternative suppliers?
• How important are industry volumes to buyers?
• What is the proportion of the cost of the industry product being purchased relative to other products
and services the buyer buys?
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 • How profitable is the buyer?
• How easily can the buyer access information about the industry’s products and services?
• Does technology exist that will impact on the power of the buyers?

Power of Substitutes
Substitutes are other products or services that can be used instead of the products or services of the
particular industry. For example, substitutes for the local stockbroking industry include:
• direct investment in property, gold or other financial products
• financial planners
• even investment in international stocks using international brokers (or online)
• simply holding cash and not investing at all.
Identifying substitutes is closely linked to the industry definition that the organisation uses. For example,
if you define the industry that you operate in as the Australian fast-food industry, all organisations providing
fast-food alternatives will be considered competition, i.e. organisations providing pizza, hamburgers, sushi,
chicken or fish and chips. Substitutes in this situation will be meal alternatives to fast food and may include
buying prepared meals from the supermarket, buying individual ingredients and cooking at home, or going
to restaurants that do not focus on the speed of service.
However, if you took a narrow definition of the industry by focusing on a particular segment (e.g. pizza),
this may change the classification. An organisation that only makes pizza, may only view other pizza
companies as competitors, with alternatives to pizza (e.g. hamburgers or sushi) seen as ‘substitutes’ rather
than competitors or rivals.
The more substitutes the buyer has for the industry’s products or services, the higher the buyer’s
bargaining power. A substitute can be defined as a direct substitute, or a substitute that fulfils the same
need for the buyer. For example, orange juice would be a substitute for a cola beverage because it quenches
thirst. An email would be a substitute for a letter or a courier-delivered document.
Technology often creates a substitute by offering the same benefit to the customer through a more
convenient method. This creates a disruption in the industry. Classic examples include video streaming
disrupting the video hire market and Uber disrupting the taxi market.
Example 2.8 describes how generic medicines act as a substitute for patented medicines.

EXAMPLE 2.8

Substituting Patented Medicines with Generic Medicines

Consider the patented medicine industry, which is a part of the overall global pharmaceutical industry. It is
estimated that discovering and bringing a new drug to market costs nearly US$900 million and takes 10 to
15 years. Discovery of new drug molecules is patent protected, to encourage companies to continue the
drug discovery process and enable discovering companies to gain returns from their enormous investment
in R&D. The patent system remains the primary mechanism for stimulating and rewarding pharmaceutical
innovations, and the key output from the process is a branded drug.
Patents, as a rule, last for 15 years, and the time taken for a new pharmaceutical to go from patent
application to regulatory approval is usually less than two years. Australia’s patent system allows for an
extension of the patent term of up to five years for new pharmaceuticals that have taken considerable
time to obtain regulatory approval.
Generic medicines are a substitute product, because they are replicas or copies of branded medicines
where the patent has expired (Fatokun & Ibrahim et al. 2011). They can be developed by a manufacturing
company through accessing data that is no longer exclusive well before a patent expires, and can be
prepared to the extent that they are ready to be marketed and sold on the day of patent expiry. However,
no sales and marketing activity can be undertaken prior to this date without prior written consent from
the original manufacturer (i.e. patent holder). This means that the total cost of developing a generic drug
is significantly lower than the costs involved in bringing the original patented drug to market.
Consequently, generic medications are generally available for retail sale at lower prices than their
branded equivalents, which has had negative implications for the sales of branded medicines. At the
end of 2010, 78% of all prescriptions dispensed were generic medicines (Hoffman et al. 2012). This is
also having negative financial implications for branded medicines.
Since the introduction of brand substitution in 1994, the generic market in Australia has grown
consistently, with one in five prescriptions being filled by generic products (i.e. four out of five are still
filled by the original branded medicine). By comparison, in the United States, 50% of all prescriptions are
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120 Global Strategy and Leadership

 filled by generic products due to a very strong focus at the retail pharmacy outlet level on substituting
the prescription where possible. This is due to the high discounts offered to pharmacists by generic
manufacturers in order to gain prescription share (around 40% to 50% compared to 10% to 20% for
the original branded product).
Industry experts predict the Australian market will be equivalent to US substitution levels within three
years, given the large sales value of the products that will go off patent over the next four years, and the
high profit margins pharmacists are offered for dispensing generic medicines.
The power of substitutes in the global patented medicine industry (which is part of the global
pharmaceutical industry) is expected to have a considerable negative impact on the future profitability
of the industry, so their power is considered high and increasing. This is mainly attributed to the number
of ‘blockbuster’ medicines that have recently come off patent, and others that are identified as coming off
patent in the near future, with few new ‘blockbuster’ medicines in the pipeline.

It is important that organisations be aware of the opportunities available to customers to purchase a direct
substitute for their products in order to ensure they are aware of industry and market trends and incorporate
this knowledge into their planning processes.

Indirect Substitutes
Not all substitutes are direct. However, the scope of indirect substitutes can be more difficult to determine
(this relates directly back to difficulties that may have been experienced in scoping the industry for
analysis). Indirect substitutes can be found for a number of items as well. For example, you may choose
to go away for a weekend or buy a new computer. Alternatively, a short weekend break could be an
indirect substitute for a new and expensive wool suit — both could cost around the same amount for the
consumer to purchase. These items are not direct substitutes, but they are competing for a share of your
available dollars. Similarly, you could buy a new fine-wool suit or you could buy tickets for the theatre for
your family.
To avoid direct substitution a number of strategies are employed, such as product bundling. Bundling
makes it more difficult for consumers to directly compare one product with another, and therefore
reduces their ability to make direct product comparisons. Banks employ this strategy effectively, by
bundling free banking, credit cards, mortgages and other services together and applying varying product
features to the components of their bundle to make comparison with other bank ‘bundles’ difficult.
So whether direct or indirect, known competitors or disruptors, the decision about what constitutes a
substitute needs to be considered carefully.

QUESTION 2.18

Use the reading from example 2.5 and your industry analysis to answer the following questions
on the accounting services industry in Australia. Some issues for consideration are listed in the
following box.
1. How would you describe the power of substitutes in the accounting services industry? Refer to
the issues listed in the box to structure your answer.
2. Provide reasons for your answer to question 1.

ISSUES FOR CONSIDERATION

Issues for Consideration on Power of Substitutes

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• Are there equivalent prices and performance products available?
• Is there new technology offering the same benefit to customers?
• How easy or difficult is it for customers to switch from the industry products to a substitute?
• Does technology exist that will improve the position of substitutes?

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Power of Complements
Complements include products and services that add value to your industry. Understanding what comple-
ments your industry now and potentially in the future may help your organisation to strengthen and protect
your competitive position.
The computer industry provides an interesting example of this. In the early 1980s this industry was
disrupted by micro processing technology and a new industry sector was born — the microcomputer. IBM
and Apple were the two key organisations manufacturing products for this new market. IBM’s adoption
of open architecture meant that the computer software, in particular Microsoft Windows, became the
proprietary standard in the industry, reducing PCs to a commodity status. This increased the value of
the personal computer industry overall, but had a significant negative impact on the profitability of IBM.
Apple, on the other hand continued to own their operating system, protecting the profitability of their
computers. They have continued to adopt this approach in relation to the smart phone industry. The success
of the iPhone is largely dependent on the success of the apps that are developed for use with it. Apple
still owns the IOS operating system and supports app development using their platform. This helps the
complementary market to grow as well as generating extra profits for Apple. Their biggest competitor is
now no longer IBM or even Microsoft but is now Google.
Apple’s ownership and protection of its operating system, relationship with app developers and
development of integrated interfaces between Apple products has become known as the ‘Apple ecosystem’.
Therefore, recognising that an organisation’s influence goes beyond conventional industry boundaries has
given rise to the term business ecosystems. The notion of ecosystems highlights the interdependencies
among the players and the evolutionary nature of business. Understanding the entire ecosystem within
which your organisation operates enables strategic decisions to be made on how best to create value within
the system, protect or build on your existing power as well as building new capabilities to improve the value
proposition of the entire ecosystem.

QUESTION 2.19

Use the reading from example 2.5 and your industry analysis to answer the following questions
on the accounting services industry in Australia. Some issues for consideration are listed in the
following box.
1. What, if any, complementary products or services add value to the accounting services industry?
2. Are there opportunities or threats evident from any of the complements identified?

ISSUES FOR CONSIDERATION

Issues for Consideration on Power of Complements

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• Are there products or services that increase the value of the industry?
• Is there differentiation in the complementary product or services’ market, or is it commoditised?
• Can the complementary product or service be used to strengthen your position in the industry?
• Is your position protected long term?
• Does technology exist that will enable complements to impact on the industry?

Intensity of Industry Rivalry

Intensity of industry rivalry is the degree of competitiveness that is found between existing industry
competitors.
The way the existing firms in an industry compete with each other will also determine the level of returns
available to any one competitor. An action by one firm may generate a reaction from other competitors.
For example, in the airline industry, attempts to offer discount fares are readily met with similar attempts
by competitor airlines — for example Ryanair and easyJet.
The intensity of rivalry is related to the following factors.
• Number of competitors. In general, the more competitors, the greater the rivalry because it is harder for
competitors to effectively cooperate with each other.
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122 Global Strategy and Leadership

• Rate of industry growth and profitability. Any slowing in the rate of growth or profitability in an industry
means that to grow, the organisation has to capture market share from another competitor, thereby
increasing rivalry.
• Amount of fixed costs. High levels of fixed costs will increase the firm’s willingness to discount to utilise
capacity, thereby increasing rivalry.
• Capacity. If the only way a producer can grow is by increasing capacity, there is an incentive for them
to fully use that capacity, which can again lead to increasing rivalry.
• Degree of government involvement. Regulation of the industry or involvement of government-sponsored
entities can have a distorting effect on how well an entity can compete with others.
• Exit barriers. Exit barriers make it more difficult for an organisation to leave an industry. Typical exit
barriers include the following.
– Investment in specialist equipment. Investments in specialised and usually high cost equipment that
cannot readily be used in other industries tend to deter industry exit.
– Specialised skills. Highly specialised skills by industry participants that cannot be easily used in other
industries tend to be a barrier to exit.
– High fixed costs. High levels of dedicated fixed costs tend to be an impediment to leaving an industry.
Almost every organisation believes that its industry experiences ‘intense’ or ‘high’ rivalry. Under the
law of averages, this is highly unlikely to be true. From the list of factors just given, it should be clear that
many industries do not really face high rivalry. In particular, in industries where growth is high, products
are differentiated and there are few competitors, it is unlikely that rivalry will be high. Be wary of simply
assuming or accepting that rivalry is high without undertaking proper analysis.

QUESTION 2.20

Use the reading from example 2.5 and your industry analysis to answer the following questions
on the accounting services industry in Australia. Some issues for consideration are listed in the
following box.
1. How would you describe industry rivalry in the accounting services industry? Refer to the issues
listed in the box to structure your answer.
2. Provide reasons for your answer to question 1.

ISSUES FOR CONSIDERATION

Issues for Consideration of Intensity of Industry Rivalry

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• What is the life cycle stage of the industry?
• What is the proportion of fixed costs in the industry’s total cost structure?
• Does the industry have too much or too little capacity?
• How are the competitors organised?
• How different are the products and services being offered by competitors in the industry?
• How well established are brands in the industry?
• Are buyers loyal to specific competitors and on what basis?
• How complex or easy is it to compare the pros and cons of industry products and services?
• How does government policy affect the industry?
• Have mergers and acquisitions been supported or blocked?
• How difficult is it to exit the industry?
• Does technology exist that will impact on the intensity of the rivalry?

Drawing Conclusions About Industry Profitability

These five forces interact to determine the attractiveness of an industry. The strongest forces become the
dominant factors in determining industry profitability and the focal points of strategy formulation.
For each of the forces considered for an industry analysis, you should conclude whether its power is
high, average or low. After establishing the power for all forces, you can then draw a conclusion about the
current industry profitability. If all forces are rated as high, industry profitability will generally be very
low. Conversely, if all forces are rated as low, industry profitability should be very high.
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MODULE 2 Understanding the External Environment 123

 When summarising, the tendency is to play it safe and draw a middle-of-the-road conclusion, but taking
this approach hides the key issues that are influencing industry profitability.
This summarising approach is based on an assumption that there is some sense of average industry
profitability. In practice, this is a problem. Few people really have much idea of what constitutes average
industry profitability. In the United States, industry profitability can be quite easily assessed objectively
by reference to publicly available industry information. However, in countries with smaller economies
(i.e. most countries apart from the industrial giants of the world), such information is often not available
or is only available for some of the competitors and may not be representative. Increasingly, however,
international comparisons of profitability are being drawn as information houses, such as stockbrokers,
researchers and consultants, access similar data from overseas sources.
The desirable level of industry profitability (i.e. return on equity) might be thought of as being a
combination of:
• a return covering the risk-free real return for the country in which the operations exist (typically 0–5%
per annum) plus
• a return for expected inflation (typically 2–5% per annum) plus
• a return for the risk involved in the industry (typically 2–8% per annum).
Overall, using these example ranges, this means industry profitability should lie in the range of 4% to
18% per annum, depending on the impact of the factors listed, with an average of around 10% per annum.
An industry with high (or low) profitability does not equate to all organisations in the industry being
similar. Organisation profitability should be assessed within the context of industry profitability and only
after industry profitability has been assessed. For instance, a good performer in an unprofitable industry
could have quite low absolute profitability.
This analysis is an important tool in strategic decision making. Leaders and managers can use this
information to:
• position the organisation so that its capabilities provide the best defence against its rivals
• influence the balance of forces
• anticipate and respond to shifts in the factors underlying them.
Example 2.9 shows how the industry analysis can be applied to the Australian architectural and
decorative branded paint industry.

EXAMPLE 2.9

Five Forces Analysis for the Australian Architectural and Decorative

Branded Paint Industry
This industry includes all brand name paints that are used to decorate or cover the surface of structures
in Australia.
Threat of new entrants is medium. There are low capital requirements for low-technology products in
the architectural and decorative branded paint industry. While there are relatively low tariffs for imports,
the volume-to-value ratio of paint makes imports generally uncompetitive. The high exchange rate for the
Australian dollar could make international purchasing more competitive for the industry. Health and safety
compliance, dangerous goods regulations (storage and transport), environmental issues and increasing
regulation are making it more difficult for small operators to enter the industry. Having distribution outlets
or contracts in place with major retail stores is critical, as more than 50% of paint is now sold through
retail outlets and imported paint has recently started to be stocked by some major hardware retail outlets.
Supplier power is low. Architectural and decorative paints are made from basic commodity chemicals
that are widely available from local and international suppliers, with supply contracts negotiated locally.
Buyer power is high and increasing. The power of buyers is increasing as sales move from trade outlets
to retail outlets, with the dominance of two key distribution chains. This power is increasing as sales
volume shifts from trade to retail outlets, in support of new product development that has moved product
development away from solvent-based products, enabling more do-it-yourself (DIY) painting.
Substitute power is medium and increasing. A number of product options are available from a number
of suppliers, including house-brand products (i.e. products developed by major retail distributors and sold
in their own outlet) and, more recently, imported paints.
Industry rivalry is high. There are many local paint manufacturers that have well-established brands
in various segments. However, consolidation of competitors over time, mainly through acquisition, has
left only three major competitors in the market that have most of the market share in the architectural
and decorative industry. Strong competition in the industry between major companies has affected past
profitability and will continue to affect future profitability. More emphasis will need to be placed on

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124 Global Strategy and Leadership

 branding and marketing to maintain or increase market share, with price becoming a key factor. Cost
competitiveness is essential, and the current competitors have to fight for market share. This means
that only limited profits can be made unless competitors can somehow differentiate themselves, such as
through new products, branding and marketing.
Future profitability. The Australian architectural and decorative branded paint industry is assessed as
medium and declining. Future profitability will continue to decline as the major manufacturers compete for
market share in a mature market that is becoming increasingly price and promotion driven. Are there any
complementary products or services that may add value to this industry and improve its overall outlook?

QUESTION 2.21

Now that you have reviewed the various aspects of the accounting services industry against the
five forces of Porter’s model and complementary forces in questions 2.15 to 2.20, draw all the
components of your analysis together.
1. Using the components from your previous analysis:
(a) Assess whether the future profitability of the accounting services industry is expected to be
average, above average or below average.
(b) What are the key driving forces of that future profitability?
(c) What external evidence is there to support your analysis or conclusions?
(d) What gaps did you discover in your understanding of the industry?
(e) What are the implications for the future of organisations in this industry?

The key points covered in section 2.4 of this module, and the learning objectives they align to, are
as follows.

KEY POINTS

2.1 Select the key concepts, factors and frameworks that relate to understanding the influence of
the external environment on organisational strategy.
• The second stage of environmental analysis is to analyse the industry to determine profitability.
• Porter’s five forces model is used to analyse why certain industries are more profitable than others
and can help explain how expected changes will affect profitability.
2.2 Evaluate the key factors related to external environment that impact growth, profitability
and competition.
• Porter found five forces could explain differences in industry profitability:
– threat of new entrants
– power of suppliers
– power of buyers
– power of substitutes
– intensity of rivalry between competitors.
• A sixth factor — complements — is commonly added for some industries.
• If all forces are high, industry profitability will be low. If all forces are low, industry profitability will
be high.
2.3 Appraise how the roles of management and leadership drive the organisational strategy in
relation to the external environment.
• Leaders and managers can use the outcome of a five (or six) forces analysis to position the
organisation so its capabilities help defend against competitors, influence the balance of forces
in the industry, and anticipate and respond to shifts in the factors underlying the forces.

2.5 UNDERSTANDING CUSTOMERS AND MARKETS

At the end of your industry analysis, you should have a clear picture on what industry your organisation
is involved in, the major forces on that industry and the growth and profitability potential it represents.
However, this is still only one part of the external analysis. Next you need to consider your consumers.
That is, the people (or organisations) who consume the products or services offered by your organisation.
These represent your ‘market’.
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WHAT IS A MARKET?
Markets include both the organisations in the industry as well as the buyers of the products and services
they offer. As with the definition of industry, an organisation’s market definition can be very broad or very
specific, depending on how the organisation’s needs and capabilities.

Market Segmentation
Market segmentation, like industry segmentation, divides the market into groups who share similar
characteristics, needs and behaviours. In order to qualify as a segment the group needs to be meaningful
and distinct. Segments should satisfy the following criteria.
• Homogeneous in terms of members. Members of a particular segment must be similar in their attitudes,
behaviours, financial status, and so on.
• Heterogeneous in terms of other segments. Each segment must be different from the others.
• Substantial. Groups must be of sufficient size to warrant special marketing efforts. This does not mean
that there has to be a large number of consumers, as a small group in sheer numbers can be profitable
(there are relatively few buyers of Rolls-Royce automobiles, but at an average price of $300 000, even
selling a limited number generates good profit for the company).
• Identifiable. You must be able to identify group members and non-group members.
• Responsive. Segment members react in a similar manner to market offerings.
There are different approaches to decide how to segment a market. These variables can be used either
by themselves or in combination.
• Demographic. Grouping customers on the basis of age, income level, gender, family size, religion, race,
nationality and language.
• Psychographic. Grouping customers into clusters based on culture, lifestyle and personality type.
• Behavioural. Grouping customers based on usage level and brand loyalty.
• Distribution. Grouping customers based on the distribution channel through which they purchase
products, such as online or at a supermarket.
• Geographic. Grouping customers based on markets made distinct by their location.
Figure 2.25 shows the women’s clothing retail market segmented by age (demographic segmentation).
Often organisations need more specific segmentation to be meaningful. Not all 35–55-year-old women
choose to dress in the same way. This is where the other segmentation variables come into play. For
example, an organisation’s products may be best suited to 20–40 year old women, living in urban areas,
who have a healthy and active lifestyle.

FIGURE 2.25 Demographic segmentation of the women’s clothing market

Women 55+ years

Teen girls and women
38.4%
15–34 years 31.9%

Women 35–54 years 29.7%

Source: Data from IBISWorld 2018.

When considering how to segment your market, national boundaries are becoming increasingly blurred
and less relevant and markets are less likely to be defined in geographical terms. There are a number of
reasons for this. Firstly, the term ’trading system’ is more open to international trade with a lowering of
tariffs (in most countries) and there is now an international monetary framework that helps reduce the risk
of fluctuating exchange rates. Also, technology has made communication and transport faster, cheaper
and more efficient across geographic boundaries and enabled information to be gathered, analysed and
disseminated globally from the palm of your hand.

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126 Global Strategy and Leadership

 As explained in module 1, big data is the exponentially increasing data sets that are created from the
millions of interactions that occur every day with internet-connected devices. The scope and volume of
this type of customer data allows market definitions to be more specific as we gain insights into customers’
behaviours and attitudes.

Market Segment Analysis

As with industry analysis, market segments also need to be analysed to assess their attractiveness and
potential. Analysis of segments should include the following.
• Who are the buyers in each segment — their characteristics, wants, needs, attitudes and behaviours?
Are they distinguishable from other segments?
• How many buyers exist in each segment? This can be expressed as total market sales or market share.
• What is their potential value — contribution margins, profitability?
• What is the potential growth rate of this segment and does it have potential to increase in the future?
• How do they shop — online/instore, regular customers or one-off?
• How loyal are they — to your organisation, product?
• Does your organisation have the products/services/capabilities to serve this segment?
Market segmentation analysis and evaluations enables organisations to choose to target the segments
that are most suitable to its resources and capabilities. These are called target markets. Some organisations
may choose to target a number of segments (for example, David Jones), while others may target only one
(for example, Lorna Jane). New entrants to an industry may target a completely new segment that is not
currently being served.
Consider the ‘sustainable fashion’ segment. These organisations use renewable energy, fairly paid
workers and transparent supply chains and target buyers who want to align themselves with companies
that share their attitude of doing minimum harm to communities and environments. For example, vegan
clothes are becoming increasingly popular, and there’s no shortage of them to choose from. Some brands,
like Keep Company and Unicorn Goods, offer an expansive generalised catalogue of vegan shirts, jackets,
accessories and more. Other brands are more specialised: Unreal Fur has a beautiful line of vegan faux-
fur, Ahisa, Beyond Skin and SUSI Studio all sell stylish vegan shoes, and Le Buns specialises in vegan
swimwear. There are upscale vegan clothing retailers, such as Brave Gentleman, as well as more casual
budget options, like The Third Estate. Many vegan clothing companies, such as In The Soulshine and
Della, have found ways to sell cruelty-free clothing while also providing humane working conditions to
their factories’ workers.
Hipsters For Sisters’ products are made entirely with recycled, upcycled, or deadstocked materials,
earning the approval of PETA. Reformation utilises a carbon-neutral production process to make its
clothes (and offers customers a $100 store credit if they switch to wind energy), while Stella McCartney’s
entire product line is vegetarian. Amanda Hearst’s Maison de Mode features a combination of Fair Trade,
recycled, cruelty-free, and organic products — as well as a comprehensive labelling system to inform
customers which is which (Tech Crunch 2019).
While this is standard marketing information, non-marketers in the organisation are often fixated on
what the organisation can produce, not what customers actually want. This is a major fallacy in planning.
All leaders and managers in the organisation need a thorough understanding of customer needs and what
drives demand, as it is critical in designing strategies — and capabilities — to meet those needs.
Example 2.10 presents one way of applying market segmentation to the Australian domestic
airline industry.

EXAMPLE 2.10

Market Segmentation in the Australian Domestic Airline Industry

If we continue the Australian domestic airline example used for industry segmentation, you can see how
the industry segments are further broken down according to customer needs and expectations. The
major market segments in the domestic airline industry are domestic travellers, international travellers and
logistics companies as shown on the left of figure 2.26. A more useful segmentation may break domestic
travellers into business and leisure travellers, as shown on the right of figure 2.26.

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MODULE 2 Understanding the External Environment 127

 FIGURE 2.26 Market segmentation of the Australian domestic airline industry

Logistics
companies: 2.6%
International Logistics companies:
travellers: 2.6% International
8.0% travellers: 8.0%
Domestic leisure
travellers: 50.5%
Domestic
travellers:
89.4%

Domestic
business
travellers: 38.9%

Source: Data from IBISWorld, 2018.

Domestic leisure travellers (occasional travellers for holidays, events or to visit friends and family)
account for more than 50% of the industry’s total revenue. Domestic leisure travellers often plan their
travel to take advantage of lower-priced flights, though in travel for fixed-date events such as weddings
or concerts, price becomes less important. Baggage allowances, convenience and service are also
considerations, but price is the most significant factor. Domestic leisure travellers (occasional travellers for
holidays, events or to visit friends and family) account for more than 50% of the industry’s total revenue.
Business travellers’ needs means time and flexibility are priorities, with price being secondary. Airlines
thus charge a premium for business traveller tickets. Demand for business travel is susceptible to
variations in organisational profitability and, increasingly, the availability of substitutes such as telecon-
ferencing. Prior to the COVID-19 crisis, the international traveller segment had been growing strongly
due to the depreciation of the Australian dollar, which made Australia a more affordable destination for
international travellers. Demand from Asian countries in particular had been growing strongly.
The logistics segment carries freight domestically. This segment has been in decline due to competition
from substitutes. Advances in big data regarding traveller behaviour and attitudes represent an opportunity
for airlines to better customise services to particular target markets.

QUESTION 2.22

Consider the Airly model (from example 2.4 and question 2.5) and explain which market segment is
Airly targeting. Provide an explanation for your response.

QUESTION 2.23

Use the reading from example 2.5 and your industry analysis to answer the following questions on
the accounting services industry in Australia.
1. Explain the market segments in the Australian accounting services industry.
2. What does each segment primarily use the industry product or service for?

The key points covered in section 2.5 of this module, and the learning objectives they align to, are
as follows.

KEY POINTS

2.1 Select the key concepts, factors and frameworks that relate to understanding the influence of
the external environment on organisational strategy.
• Market segmentation divides the market into groups with similar characteristics, needs and
behaviours.
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128 Global Strategy and Leadership

 • Segmentation variables may be demographic, psychographic, behavioural, channel-based or
geographic.
• Market segment analysis and evaluation enables an organisation to choose target segments that
are most matched to the organisation’s resources and capabilities.
2.3 Appraise how the roles of management and leadership drive the organisational strategy in
relation to the external environment.
• It is a common mistake to focus on what the organisation can produce rather than on what
customers want. Leaders and managers must make sure these align.

2.6 COMPETITION IN THE INDUSTRY

Once the analysis of the growth and long-term profitability of the industry has been undertaken, it is
important to turn attention to the competition within the industry. This analysis uncovers how competitive
the industry is, what drives the competition and what is required for an organisation to successfully compete
in the industry. Porter’s five forces analysis conducted earlier gives insights into the level of competitive
rivalry in the industry. The next step is to consider the nature of this rivalry and the basis of competition
within the industry.

STRATEGIC COMPETITION
Competition can be natural or strategic. Natural competition refers to survival of the fittest. It is simply an
evolutionary process that weeds out weaker rivals — the law of the jungle. Strategic competition on the
other hand is the studied deployment of resources, based on a high degree of insight of a business system.
It tries to leave nothing to chance (Jain, Haley, Voola & Wickham 2012).
Strategic competition is dependent on strategic decisions regarding actions, resources and capabilities
within the organisation and requires:
• the ability to understand competitive interaction as a complete dynamic system that includes competi-
tors, customers, money, people and resources
• the ability to use this understanding to predict the consequences of a given intervention in the system
• the availability of uncommitted recourses that can be dedicated to different uses and purposes
• the ability predict risk and return with sufficient accuracy and confidence to justify the commitment of
such resources.

BASIS OF COMPETITION
Competitor analysis begins with identifying the basis of competition within the industry. This combines
your knowledge from the remote and industry analysis with customer and market knowledge to:
• identify what drives demand, choice, price and cost
• assess the current and potential risks that may affect future developments in the industry and
• discover what underpins sustainable competitive advantage.
Table 2.5 presents a number of questions that can help determine that basis of competition and
example 2.11 applies these questions to analyse the chocolate manufacturing industry.

TABLE 2.5 Basis of competition questions

Basis of competition Questions

Demand What drives demand for the products and services of the industry?

Choice What drives price, product performance and supply availability?

Price How is price determined in the industry?

Costs What are the main drivers of cost in the industry?

Current and potential risks What are the current and potential risks?

Source: CPA Australia 2020.

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MODULE 2 Understanding the External Environment 129

 EXAMPLE 2.11

The Basis of Competition in the Chocolate Manufacturing Industry

Chocolate
manufacturing
industry Response

What drives • Income — households in the top 10% of income earners spend almost double the
demand for the amount on chocolate than those in the bottom 10%.
products and • Demand for chocolate is highly price-elastic, with value for money being a key driver
services of the of the purchase decision.
industry? • Frequency of shopping — about 70% of chocolate purchases are made on impulse,
with 40% of purchases consumed immediately.
• Location of products for sale to support impulse purchasing.
• Recognised branding to enable product location in convenience stores, which stock
fewer product lines.
• Key events for gifts such as Easter, Christmas, Valentine’s Day and Mother’s Day.

What drives • Consumers may not be eating chocolate as often as they used to, but they are
price, product spending more on premium varieties as an indulgence.
performance • Key events such as Easter, Christmas, Valentine’s Day and Mother’s Day increase
and supply supply availability.
availability? • Extensive merchandising, marketing and media strategies. These include placing
products in prominent displays and adjacent to supermarket checkouts, specific
advertising campaigns, point-of-sale promotional materials, brand-building
promotions and quantity purchase discounts.

How is price • Price is directly related to perceptions of quality. Price is therefore a key success
determined in factor for those offering house-brand or no-brand products. Manufacturers
the industry? competing on the basis of quality are able to charge a premium. Differentiation
can reduce the necessity to compete on price. Competitors who compete in the
marketplace on the basis of low-grade or generic brands need to make sure that
price is one of their key success factors. Confectioners who compete on the
basis of quality need to develop differentiation strategies because price is not an
important determinant in the consumer’s purchasing decision.

What are the • Material inputs like cocoa, sugar and milk represent the largest components. Cocoa
main drivers represents about 40% of raw material costs. Other ingredients include milk and
of cost in the sugar, flavourings, fruits, nuts and artificial colours. The cost of these raw materials
industry? is a function of agricultural commodity prices. All these ingredients are locally
sourced, which eliminates high transport costs, and these ingredients are readily
available from many suppliers.
• Labour costs reduce as the level of capital intensity increases. However, labour
costs can be up to 25% for smaller manufacturers who specialise in high-quality
handmade chocolates that use fewer automated processes.
• Packaging is about 15% of the cost of inputs.
• As chocolate is often an impulse purchase, it responds extremely well to point-of-
sales merchandising. Displays are more important than price reductions and enable
retailers to generate full profit margins at the point of sale.
• The large multinationals achieve high production efficiencies by producing large
volumes and can sustain lower average selling prices because of the mass-market
nature of their products. Smaller manufacturers of high-quality products have lower
volumes and therefore incur higher production costs.

What are the • Increasing consumer concerns about dental health and obesity — chocolate
current and products are perceived to be unhealthy and high in calories.
potential risks? • Growth in-house brand chocolate sold in supermarkets increasing competition and
eroding margins.
• Government regulations and possible banning of TV advertising before 9.00 pm.
• An ageing population in key consumer markets (developed countries). Chocolate
consumption per capita peaks between 12 and 24 years of age, with a marked
reduction after the age of 25.

Source: CPA Australia 2020.

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130 Global Strategy and Leadership

 QUESTION 2.24

Use the reading from example 2.5 and your industry analysis to answer the following question on
the accounting services industry in Australia.
Examine the basis of competition for the Australian accounting services industry and summarise
your responses on a work sheet (refer to table 2.5 and example 2.11 for guidance).

INDUSTRY KEY SUCCESS FACTORS

In all industries there are a few factors that are critical for an organisation to compete successfully.
Understanding the basis of competition makes it possible to summarise these factors. The question we
are trying to answer here is: ‘What would provide a sustainable competitive advantage?’
For the chocolate industry example, industry key success factors might be as follows.
• Strong brand names. High-profile brands with strong customer loyalty are fundamental to maintain
market share, generate high sales growth and prolong the product life cycle. Large companies with
significant promotion budgets are able to maintain strong brand images through constant promotion
and support the introduction of new products and brands. Organisations like Nestlé and Cadbury are
examples of strong brand names — these brands have been established for decades.
• Efficient selling and distribution networks. The larger manufacturers must ensure that their products
are widely and efficiently distributed so they are available for impulse purchases by consumers. As
lower prices are important to ensure competitiveness, cost-effective distribution and logistics are critical.
Manufacturers need to invest heavily in establishing strong relationships with downstream retailers.
Good access to confectionery stores is important for high-quality chocolates. Cadbury sells its products
globally, while manufacturing them locally in order to reduce distribution costs. While Lindt has
traditionally been purchased by consumers in retail stores, it is now operating its own shop fronts,
making its product more accessible to customers.
• Effective brand support, marketing and strong merchandising. Manufacturers must ensure their product
has strong marketing support and merchandising. This includes prominent displays, good product place-
ment near retailer checkouts, advertising and promotional campaigns to create demand, promotional
spend with retailers, point-of-sale materials, brand-building promotions, sponsorships and quantity
purchase discounts. As chocolate competes with other impulse purchases, it has to be well placed
for consumers. Strong brand support is important to enable brand recall for impulse purchases. Nestlé
and Cadbury both have high costs relating to advertising, with many of their campaigns prominent in
advertising history. Further, chocolates have prominent merchandising for impulse purchase at the front
cashier register.
It is preferable that the list of factors be controllable in terms of cost by the organisation, and the list
consists of factors that the industry defined competes on. However, the challenge in defining the key success
factors is when there is disruption in the industry that may change the relevance of particular factors. Think
about the mobile phone industry. Critical success factors in the early days of the industry included reliable
products and efficient distribution networks. Nokia had what looked like an unbeatable market position
with the most sturdy and reliable phones and a global distribution network. However, the introduction of
the iPhone to the industry changed the way mobile phones were perceived. Value no longer lay in a phone’s
sturdiness, but in its features. For example, phones could now receive and send emails, play music, take
photos and even search the internet. A wide distribution network remained a critical success factor, however
a new critical success factor of integration of technology was born. Nokia was caught completely off-guard
as it has not invested resources in technology and R&D. By the time they changed their strategic direction,
their once envious market share position had been taken by Apple.

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MODULE 2 Understanding the External Environment 131

COMPETITIVE POSITION
You now understand the level of competitive rivalry, the basis of competition in the industry and the critical
success factors. The next step is to determine your organisation’s competitive position, which describes
how an organisation differentiates itself from competitors in its market. In order to do this, you first need
to understand your competitors. The following questions will help.
• Who is the competition? Now? Five years from now?
• What are the strategies, objectives and goals of each major competitors?
• How important is a specific market to each competitor and what is the level of its commitment?
• What are the relative strengths and limitation of each competitor?
• What weaknesses make competitors vulnerable?
• What changes are competitors likely to make in their future strategies?
• So what? What will be the effects of all competitors’ strategies on the industry, market, your
organisation?
Where do you get this information? Like your BI, you also need to incorporate a competitive intelligence
system. Again, there are a variety of sources for competitor information, that can be broke down into three
main areas.
1. What competitors say about themselves — public documents, annual reports, trade documents.
2. What others say about them — customers, suppliers.
3. What employees have observed about them — based on interactions of your salespeople with competi-
tors and their customers.
The more you know about your organisation’s competitors, the better you will be able to position
yourself against them and protect yourself from future changes. You should be able to identify who the
stronger or weaker competitors are within the industry and be able to rank your business against them,
based on its capabilities and resources. An organisation needs to be positioned so that its capabilities
provide the best defence against competitive forces. All strategic decisions should align with or improve
this competitive position.

Identifying and Assessing Competitors

Unless your organisation is a monopoly business (which is less and less likely in these days of consumer
protection), your customers do not have to buy from you. Your competitors are the organisations in your
industry that compete with your organisation for customer dollars. It is important to understand what your
competitors are good at — that is, their strengths — in order to:
1. confirm and communicate your competitive advantages to customers
2. use competitive intelligence that may reveal important industry trends that you have missed
3. use this information as a key input into strategic decision making so that your organisation can position
itself differently from its competitors.
Although there may be a large number of organisations in an industry, not all of them are direct
competitors. If you can understand, for example, where you have recently lost customers and who they have
gone to and why, you will gain a good insight into which competitors you need to know more about and
why they have successfully attracted some of your customers. This is a crucial point, particularly in this
age of technological advancement. Many organisations have been caught off guard by new technology
that has provided the same, or improved benefit to their customers and thus disrupted the industry
(e.g. taxis, video rentals and mobile phones). So when you consider your organisation’s current com-
petitors, you need to consider not only those that provide the same product or service, but also those who
offer substitute products or services that satisfy the same need or even change the consumers’ expectations
regarding the need. The following questions may be helpful in defining competitors.
• What need does the product/service fill?
• Which organisations provide exactly the same product/service to fill the need?
• Which organisations provide an improved product/service that fills the need?
• Which organisation provides a breakthrough product/service that has/ or has the potential to change
consumer behaviour and expectations?

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132 Global Strategy and Leadership

 Once you have created your competitor list, you need to determine those that are the highest threat to
your organisation. Again, the risk here is to underestimate the threat of a new player, who may only have a
small market share at this stage. This is where leaders and managers need to show foresight in assessing the
potential changes in the industry. Major competitors then need to be considered in more detail by asking
the following questions.
• What is its business strategy?
• Who are its key stakeholders and what are their objectives and values?
• What is its current position in terms of market share, financial performance, operating efficiency and
long-term growth and development?
• What plans does it have to change either the scope or nature of its operations?
• What is its operating position in terms of its current volume compared with its maximum capacity, its
breadth of product range and its relative cost structure?
• What distinguishing features or customer benefits does it have? In other words, what is its value
proposition?
• What are its key capabilities or competitive strengths?
• What are its key competitive weaknesses?
• What assumptions does it hold about the industry and about itself?
The organisation’s value proposition is in effect how the organisation will uniquely position itself
against its competitors. As such, it is necessary to take into account the basis of competition in the industry
(i.e. what drives competition) as well as how competitors are positioned so as to find a unique competitive
position. It is therefore broader than just the basis of competition alone and industry key success factors
that matter when forming the value proposition — the positioning of each of the key competitors also
needs to be taken into account so that the organisation has a unique position in the market.
The value proposition is demonstrated as a business or marketing statement that an organisation uses to
summarise why a consumer should buy a product or use a service. This statement convinces a potential
consumer that one particular product or service will add more value or better solve a problem than other
similar offerings. Companies use this statement to target customers who will benefit most from using the
company’s products, and this helps maintain a competitive advantage. Value propositions are a promise by
an organisation to a customer or consumer segment. They are easy-to-understand reasons why a customer
should purchase a product or service from that specific business. A value proposition should be a clear
statement that explains how a product solves a pain point (i.e. a real or perceived problem), communicates
the specifics of its added benefit, and states the reason why it’s better than similar products on the market.
The ideal value proposition is concise, and it appeals to a customer’s strongest decision making drivers.
They can be a good indicator as to whether or not a company is a threat as they will appeal to the same
customers and their motivations.
Table 2.6 summarises some of the variables to consider in a competitor analysis and provides a template
to assess each of these components in relation to the key success factors identified earlier.
This evaluation of competitor attributes is subjective. In module 3 you will move from external analysis
to internal analysis — assessing the strategy and performance of the organisation against its stated strategy.
When you undertake internal analysis, another line can be added to competitor analysis — the relative
position of your organisation.
However, for now, developing a standard approach is useful as it enables a more direct comparison
between competitors. Over time it is also an extremely useful exercise to keep up to date within an
organisation. It provides a forum for debating and agreeing upon important assumptions, information
and facts. It is very useful for discovering both what is agreed upon and commonly shared within the
organisation and what is not agreed upon and not known about competitors. If documentation is kept in a
systematic way over a period of time it should be possible to start predicting competitor behaviours.
Example 2.12 provides an illustration of three fictitious tertiary institutions operating in the Country
Nomad higher education industry, and will test your knowledge in understanding the various frameworks.
The three companies are East Shore University, Bridgeland College and the University of Excellence.

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MODULE 2 Understanding the External Environment 133

 TABLE 2.6 Competitor analysis worksheet

Competitor factors Competitor 1 Competitor 2 Competitor 3

Need satisfied

Value proposition

Facilities and equipment

Personnel skills

Management capabilities

Finance capabilities

R&D capabilities

Operations capabilities

Marketing capabilities

Strengths

Weaknesses

Source: CPA Australia 2020.

EXAMPLE 2.12

Higher Education Industry in Country Nomad

The Country Nomad education industry as a whole generated $102.3 billion in revenue in 2019. As Country
Nomad’s largest service export, education contributes significantly to the country’s economic affluence,
with education exports valued at an estimated $7.44 billion in 2019–20. However, this has not always been
the case. Only over the past 40 years has Country Nomad become the ‘knowledge economy’ it is today.
As more jobs now require the skills and knowledge taught through higher education (universities, colleges
and institutes), Country Nomad has observed strong growth in the number of such student enrolments,
both locally and internationally.
Industry experts summarise the following areas as the key success factors for the industry.
• Access to a highly skilled workforce — recruiting experienced and qualified staff promotes the quality
of teaching and reputation of the institution.
• Current and relevant courses — institutions should be responsive in offering courses that address
industry skills shortages and meet student demand.
• A good reputation — increases demand for enrolment.
• Export markets — due to the large export market for education, it is important to develop these channels
to generate extra revenue from the full-fee paying overseas students.
This example will focus solely on the higher education industry. The market share breakdown of the
three main competitors in the Country Nomad higher education industry is shown in table 2.7.

TABLE 2.7 Country Nomad higher education industry market analysis

Domestic Overseas
student student Online teaching Total industry
enrolments enrolments facilities market share

East Shore 17.0% 28.5% 7.0% 17%

University

Bridgeland College 16.0% 15.0% 18.0% 15%

University of 7.5% 1.5% 31.0% 13%

Excellence

Other† 59.5% 55.0% 44.0% 55%

†
There are many small education institutions, none of which individually holds a dominating market share.
Source: CPA Australia 2020.

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134 Global Strategy and Leadership

 East Shore University
East Shore University is Country Nomad’s most prestigious university. It has over 50 000 students, both
local and international, and more than 7000 staff members.
Historically, local students accounted for as much as 90% of the university’s student community. How-
ever, after three consecutive years of decreasing revenue over the period of 2009–10, the university shifted
focus to attracting full-fee paying overseas students by providing more accessible international enrolment
channels. East Shore University also created an agreement with the Nomad Country Government, whereby
overseas students are more easily able to gain entry visas to study at East Shore. In 2019, it was estimated
that local students would comprise only approximately 50% of the university’s enrolments.
East Shore University is a research-led institution. Its campuses boast 20 discipline-specific research
facilities, and the staff and research teams commonly produce world-class academic breakthroughs.
Given the continued success of this part of the institution, East Shore receives generous government
funding to ensure the maintenance and progression of its research practices. This funding filters through
to the teaching and learning streams, enabling the university to provide above-standard wages to its
teaching staff. This has attracted high-class educators to the university, facilitating a profitable cycle of
research success and liberal government funding.
East Shore University, however, has maintained a traditional route to education since its inception in
1901. This has fostered a culture of tradition, rather than innovation. As such, the university is yet to
develop a sufficient online platform to keep up to date with the current technological climate, potentially
limiting the university’s accessibility, as well as distance education and international students.
Bridgeland College
Bridgeland College formed in 2006 from a merger between two small, underperforming higher education
institutions, Hopetoun University and Bridgeland Institute. Since its formation, Bridgeland College has
generated a profit, albeit gradual and incremental.
Due to its recent development, there is a need to quickly generate revenue to continue to build the
university, its facilities and its reputation. Bridgeland College offers a comprehensive and integrated online
teaching and learning system (the Teaching and Learning Hub) that caters for distance education, mature
age and international students. This allows the university to gain excess revenue from these otherwise
inaccessible students.
Bridgeland College aims to attract a large number of students through the provision of more courses
than standard universities. It offers a range of undergraduate, postgraduate and double degrees, with
particular consideration of student demand, as well as areas with skills shortages. However, the newness
of the university, compounded by the extensive reach it is trying to achieve in the number of courses
it offers, has led to the quality of teaching staff suffering. The sheer volume of courses has meant that
staff with specialised knowledge are attempting to teach additional disciplines in which they are not
experienced. Thus, although numerous courses are offered, the standard of teaching is below average.
Unfortunately, this major quality control issue has infiltrated into the media, and the lecturers’ lack of
expertise has caused Bridgeland to lose credibility and attractiveness.
University of Excellence
The University of Excellence is a niche educational institution, specialising in business and finance
curricula. With only 15 000 students, the university is renowned for its exclusivity and high standards of
entry. Students must rank in the 99th percentile in their final secondary school year for their applications
to be considered. The university accepts a limited number of students each year, and often rejects more
than 80% of applicants.
Such high enrolment prerequisites are justified by the world-renowned quality of academic staff.
Commonly, business and finance experts work in relevant industries due to the lucrative nature of work
available, leading to a decline in the quality of academics in these areas. The sterling reputation of
the University of Excellence has proliferated, however, due to its exclusive access to high-profile, well-
qualified and experienced teaching staff.
This reputation has led to the university receiving considerable bequests and donations from high-
profile members of the business and finance sectors. Thus, the university does not have any difficulties
with funding, and is considered to be highly affluent.
The University of Excellence’s financial prosperity, combined with its desire to remain a niche and
exclusive Country Nomad institution, has meant that almost no places are reserved for international
students. Approximately 98% of the university’s student community is comprised of local students.
Nonetheless, student fees are already 20% higher at the University of Excellence than the second most
expensive Country Nomad institution, Braymar University.
The University of Excellence offers sophisticated and integrated online teaching facilities that attract a
significant portion of distance education students.

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MODULE 2 Understanding the External Environment 135

 QUESTION 2.25

Use the information in example 2.12 and the worksheet given in table 2.11 to respond to
this question.
Summarise the strengths and weaknesses of each competitor (East Shore University, Bridgeland
College, University of Excellence).

IDENTIFYING STRATEGIC GROUPS

As mentioned previously, not all industry players compete directly with each other. There are frequently
several different groups of competitors. Each group consists of competitors following a similar strategy in
a similar product-market classification, whereas other organisations in the industry have either a different
strategy or a different target product market. These groups are called strategic groups. Each strategic
group has a different position in the market based on having a different strategy for competing.
As an example, if we look at a few competitors from the Australian chocolate industry (see figure 2.27),
we see that, although there are several market players competing, there are three main strategic groups,
based on two axes — category of chocolate quality and market player (organisational) size. The first group
is tightly linked and competes in the everyday part of the market, and all of the companies here are large.
The second group moves more towards specialised chocolates and is smaller in size. The third group is the
luxury market and companies in this area are generally very small because it is a small niche market. This
is discussed further in example 2.13.

FIGURE 2.27 Strategic groups in the Australian chocolate industry

Luxury
Haighs/Koko Black/Pana

Lindt/Ferrero
Category

Mid-range Private label

Cadbury/Nestlé/Mars

Everyday
Large Medium Small
Organisational size

Source: CPA Australia 2020.

EXAMPLE 2.13

Strategic Groups in the Chocolate Manufacturing Industry

In the chocolate manufacturing industry there are a few large manufacturers that operate globally. In the
markets where they compete, there are usually a number of smaller competitors. The large manufacturers
and the small manufacturers form two strategic groups that generally compete on the basis of the following
business models.
Large chocolate manufacturers usually compete on the basis of cost. Their business models can be
characterised as follows:
• the supply of reasonable-quality products at lower average selling prices for a low price to the
mass market
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136 Global Strategy and Leadership

 • high-volume, automated efficient production facilities generating low unit cost (i.e. economies of scale)
• high investment in strong distribution relationships with major retailers and convenience stores to secure
shelf space, particularly in key locations (i.e. checkout areas)
• high level of branding and promotion investment to support brands and stimulate impulse purchases
by consumers
• the supply of a wide variety of chocolate and confectionery products in general.
Specialised chocolate-makers usually compete on the basis of high-quality, differentiated products or
target niche markets. Their business models can be characterised as follows:
• higher average selling prices for high-quality and typically handmade chocolates
• lower volume production facilities with higher labour costs due to the manual work involved in handmade
chocolate, resulting in higher average cost per unit
• investment in distribution relationships with specialist chocolate stores to secure shelf space
• often limited geographic coverage, sometimes only in one region
• strong local branding and promotional activities to generate brand awareness as a luxury product for
luxury indulgence and gift markets
• specialisation in high-quality chocolate and confectionery only.
In small markets, it is typical to have two or three strong industry competitors who hold a significant
concentration of market share, and then several smaller competitors who capture the balance, competing
on a different basis from the larger companies. Similarly, in industries that have capital intensity, such as
the global pharmaceutical industry, there are typically only a few large global competitors.

QUESTION 2.26

Refer to example 2.5 and your industry analysis to answer the following questions on the accounting
services industry in Australia.
1. Identify the main competitors in the Australian accounting services industry and the strategic
groups they appear to fit in to.
2. Examine the key basis for competition, based on what distinguishes the strategic groups from
each other.

The key points covered in section 2.6 of this module, and the learning objectives they align to, are
as follows.

KEY POINTS

2.1 Select the key concepts, factors and frameworks that relate to understanding the influence of
the external environment on organisational strategy.
• Competitor analysis combines remote, industry and customer and market insights to identify what
drives demand, choice, price and cost, assess current and potential risks and discover what
underpins sustainable competitive advantage.
• Key success factors refer to those factors that are critical for an organisation to compete
successfully.
• Competitive position refers to how an organisation differentiates itself from competitors in its market
— its value proposition.
2.2 Evaluate the key factors related to external environment that impact growth, profitability
and competition.
• The nature of competition in an industry is determined by the drivers of demand, choice, price
and cost.
• Direct competitors are those competing for the same customers, whether with the same products
or services, substitute products and services that satisfy the same need or products and services
that change the basis of competition.
• Strategic groups comprise competitors following a similar strategy in a similar product-market
classification.
2.3 Appraise how the roles of management and leadership drive the organisational strategy in
relation to the external environment.
• Strategic competition is the strategic deployment of resources and capabilities based on an
understanding of competitive interaction and forecast risks and returns associated with committing
the resources.
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MODULE 2 Understanding the External Environment 137

2.7 FURTHER IMPLICATIONS FOR LEADERSHIP
AND MANAGEMENT
Module 1 showed that finance professionals are increasingly required to play a more strategic role that
both incorporates and extends beyond traditional accounting functions. The contemporary CPA’s role
in organisational strategy implementation includes aligning the organisation’s structure with its business
strategy. This involves resource and budget allocations to facilitate and fund the organisation’s strategic
options, and developing key performance indicators (KPIs) to check the organisation’s performance against
its strategy. Hence accounting has become more integrated with strategic analysis and decision making.
It is essential to identify the key external and internal factors that affect the organisation, because they
guide informed decisions about the need for change and help in selecting which strategies to implement.
This information is fundamental for transformational leadership, which requires all members of the
organisation to be convinced of the need for change.
Having initiated the strategic process, it is important to lead an organisation methodically through
the strategic phases, starting with a detailed examination of the external environment as described in
this module.

FRAMING THE EXTERNAL ANALYSIS

This module has provided a framework for analysing the external environment, focusing on an organ-
isation’s industry and the remote environment. We have now established an understanding of expected
industry growth and the estimated amount and causes of industry profitability. By starting with the external
environment in strategy analysis, leaders and managers are forced to look outside their organisation and
consider issues that are not normally part of their day-to-day world. This results in a more critical analysis
of the organisation in terms of how its strategy, stakeholders, capabilities and performance fit in the context
of the external environment and how this fit may need to change and evolve over time.
Leadership is necessary to ensure a consistent and disciplined approach to external analysis, which is
based on sound reasoning and a consideration of all major relevant factors. As such, leaders take an active
role in the structure, development and implementation of the external analysis in order to optimise its
relevance to the organisation. They provide insight into the type of forces that are most relevant to the
industry and therefore should be assessed as well as the resources to enable the collection and analysis of
the relevant data.

ESTABLISHING A DATA MANAGEMENT APPROACH

A key role of strategic leaders and managers is to consider how their organisation will manage the
increasingly complex and dynamic information landscape. Many organisations today are taking a cross-
functional approach to this, with input from marketing, finance, legal, operations and other relevant
functions as to their data and reporting requirements. This requires a higher level of data management
than ever before. Some organisations have the capabilities to manage this themselves, others create ‘data
curator’ roles to match data requests with the most relevant and reliable sources, and others turn to third-
party data and consulting services. To ensure the organisation get best ‘bang for their buck’, it is more
important than ever for the leaders and managers to be clear on what information they need and why.
As technology management has now become a key part of corporate strategy, it is essential that IT and
finance leaders work together to optimise strategic outcomes. IT will need the support of finance to build
capabilities in digital architecture and beyond, support innovation, defend against disruption and enable
digital transformation. Organisations that understand the importance of building capabilities to support
technology and innovation across many platforms will be the first to realise the benefits and competitive
advantage that embracing new technologies can bring. Leading organisations have disciplined, measured
innovation programs that align innovation with business strategy.

RESPONDING TO CHANGE
While leaders and managers can help frame the scope of external analysis based on their expertise and
experience, they need to resist falling into the trap of believing that they already know all there is to
know. Instead, unproven assumptions and far-fetched interpretations of environmental factors must be
challenged while at the same time they remain open to the potential opportunities and threats that may be
uncovered by the external analysis and be prepared to act on them, through strategic decisions that secure
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138 Global Strategy and Leadership

the organisations future growth and profitability. The industries that prosper in the longer term are those
that are perceptive enough to recognise the changes taking place in their environment and markets, and
have the capabilities to put in place strategies to respond to these changes.
These changes can be known — related to the industry’s life cycle, or unknown — disruptions. Either
way, leaders need to recognise the change and take the appropriate actions in order for the organisation to be
able to adapt and secure its future profitability. Leaders need to recognise which stage of the life cycle the
industry is in and recognise the signs of transition to the next phase in order to make the most appropriate
strategic decisions. Disruptive technologies have been shown to cause established leaders in an industry
to fail as established thinking prevents them from noticing or taking the new technologies seriously. It
is not until the new technology matures to its most efficient format that it begins to truly impact on the
market leaders. It is then usually too late for the established players to begin investing in these technologies
or capabilities.
The more information available about the history of the industry, and the more that is known about
developing trends and technologies, the more anticipation and foresight the organisation will hold. This
can place the organisation at an advantage when it comes to planning its future strategy. It is for this
reason that managers and leaders need to be open to challenging the status quo and acting on, or having
contingencies to act on, the insights gained through external analysis
A significant change in leadership has meant that finance leaders and managers are now expected
to balance, protect and preserve all stakeholder interests. As such, they are tasked not only with acting
with personal integrity, but also providing accurate, objective and meaningful information, disclosure and
transparency, secure handling of sensitive information and confidentiality as well as compliance with any
relevant rules and regulations. Navigating these ethical minefields is now an important skill for leaders
to develop.
In summary, external environmental analysis is an essential tool in strategic decision making. Leaders
and managers can use this information to: position the organisation so that its capabilities provide the
best defence against its competitive rivals; influence the balance of the various forces on the industry; and
anticipate and respond to shifts in the current operating environment.

REVISITING THE ROLE OF THE CPA

CPAs are strongly qualified to lead in many facets of analysis of the external environment because they
understand the need to justify assertions with evidence and have the ability to provide objective analysis
that is based on quantitative information.
Table 2.8 presents key issues for finance professionals to consider in relation to external analysis.

TABLE 2.8 Key questions for finance professionals to consider and answer

Concepts/models/approaches that can

Key questions be used to answer the key questions

What is the ‘industry’ of analysis? How can it be defined? How broad • Industry definition
or narrow is it?

What’s the typical way products or services in this industry get to the • Industry value chain
customer (i.e. how is the value chain for the industry defined)? Who
are all the different types of organisations involved? Where does my
organisation sit within this chain?

What are the industry segments? Are any growing faster than • Industry segmentation
others? Are any declining more quickly than others? • Historical data analysis

What stage of the industry life cycle is the industry in? How well • Industry life cycle stages (start-up,
developed/established is the industry? Are all the segments in the growth, maturity, shake-out, decline
industry at the same stage of the life cycle? or renewal)
• Historical data analysis

What have been the key remote environmental factors influencing • STEEPLE (social, technological,
past growth in the industry and what is expected to drive environmental, economic, political,
future growth? legal and ethical)

(continued)

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MODULE 2 Understanding the External Environment 139

 TABLE 2.8 (continued)

Concepts/models/approaches that can

Key questions be used to answer the key questions

What are the forces that determine the profitability of the industry? • Porter’s five forces of industry
What therefore is the current and expected profitability of the competitiveness (new entrants,
industry? How are the forces changing and so will the industry be suppliers, buyers, substitutes,
more or less profitable than today? industry rivalry)

Who are the customers for the products and/or services of the • Linking markets to industries
industry? How are they defined? • Customer market segmentation

On what basis do providers in the industry compete? What are the • Industry definition
key success factors for them to be able to successfully compete? • Value chain
• The basis of competition
• Industry key success factors
• Competitor analysis worksheet
• Strategic groups

Source: CPA Australia 2020.

FROM EXTERNAL TO INTERNAL ANALYSIS

External analysis provides a baseline from which you can view your organisation and place it in the
appropriate industry. It will make you think about where best to direct your strategy based on the industry,
growth possibilities, competitiveness and other relevant factors.
To do this effectively you need to understand the business strategy of the organisation and then
understand how it has been performing against its competitors and its own objectives. Evaluation of
performance is in the context of performance relative to competitors, both local and international depending
on the scope of the organisation. Hence the need to link the external analysis undertaken with an internal
analysis — the focus of module 3. Before progressing to the internal analysis in module 3, example
2.14 provides an opportunity to integrate knowledge about the external analysis by examining a range
of issues related to the digital economy that are serving as important changes in the external environment
for numerous industries.

EXAMPLE 2.14

Competition Issues in the Digital Economy

Technology has permeated many aspects of our everyday lives from work to socialising. The past
decade has seen IT-based businesses such as Alibaba, Amazon, Apple, Facebook and Google rise to
be the world’s largest companies by market capitalisation, overtaking traditional mining, energy and
telecommunications firms. Table 2.9 shows this change.

TABLE 2.9 Top 10 global companies by market capitalisation, 2009 and 2019

2009 2019

Market Market
value value
($US ($US
Ranking Company Sector billions) Ranking Company Sector billions)

1 Exxon Mobil Oil and gas 337 1 Microsoft Technology 905

2 PetroChina Oil and gas 287 2 Apple Technology 896

3 Walmart Consumer 204 3 Amazon.com Consumer 875

services services

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140 Global Strategy and Leadership

 4 ICBC Financials 188 4 Alphabet Technology 817
(the parent
of Google)

5 China Mobile Telecommuni- 175 5 Berkshire Financials 494

cations Hathaway

6 Microsoft Technology 163 6 Facebook Technology 476

7 AT&T Telecommuni- 149 7 Alibaba Consumer 472

cations services

8 Johnson Healthcare 145 8 Tencent Technology 438

Holdings

9 Royal Dutch Oil and gas 139 9 Johnson & Healthcare 372
Shell Johnson

10 Procter & Consumer 138 10 Exxon Mobil Oil and gas 342
Gamble goods

Source: Adapted from PwC, 2019, ‘Global top 100 companies by market capitalisation’, www.pwc.com/gx/en/audit-
services/publications/assets/global-top-100-companies-2019.pdf; PwC, 2015, ‘Global top 100 companies by market
capitalisation’, 31 March update, www.pwc.com/gx/en/audit-services/capital-market/publications/assets/document/pwc-
global-top-100-march-update.pdf.

The control the big technology companies have over consumer data gives them significant market
power and, as such, has raised concerns related to competition as well as to consumer protection
and privacy.
The new products and services provided (often free of charge in the case of social media and search
platforms) have disrupted many industries. They have provided a digital infrastructure for a variety of
services including marketplaces (Amazon), application stores (Apple), social networking sites (Facebook)
and search engines (Google).
This ‘platformisation’ has implications not only for the nature of transactions in certain industries, but
also for the ability of firms to scale rapidly, thereby affecting the structure of the entire segment. So large
technology companies have actually changed the entire global business landscape.
With regard to specific industries, Amazon held an over 90% share in five different product markets in
the first quarter of 2018, Facebook had a 68.95% share of the social networking industry as at February
2019 and Google dominates the search engine market, with an 89.95% share as at January 2019. The
ACCC has found that, in Australia, 50% of traffic to Australian news media websites comes from Facebook
or Google. Dominant platforms such as Amazon, Apple and Google either own and operate the technology
infrastructure or provide a service on which traders and developers depend. The market power and
dominance of these key platforms affect both the access and survival of small innovative companies
in these markets.
What Makes Digital Platforms Special
The European Commission has defined an online platform as ‘an undertaking operating in two (or
multi) sided markets, which uses the internet to enable interactions between two or more distinct but
interdependent groups of users so as to generate value for at least one of the groups’. Platforms involve
services and activities such as marketplaces, social networking, search engines, payment systems and
video sharing. Some of their unique characteristics include the following.
• Digital platforms have new business models and function with algorithms, which are designed to collect
and process data, with decisions made based on that data.
• Data-driven network effects are one of the features that characterise digital platforms. A network effect
‘refers to the effect that one user of a good or service has on the value of that product to other existing or
potential users’. For example, people may wish to use Facebook for social networking simply because
their friends do so. The value of using digital platforms directly depends on the number of users.
• Economies of scale and scope as data-driven network effects and control of data create high barriers
to entry. For example, Google can use the search data of users to improve its search engine algorithms;
new entrants to the market do not have this advantage.
• Digital platforms have challenged the traditional approach to doing business, which defined the goal of
a private company as maximising profits. The new business models prioritise growth over profits in the
short to medium terms, that is, the maximisation of the number of users rather than profits.
• Dominant platforms have also expanded into other related businesses, with the objective of accessing
more data. For example, Google gives its Android operating system free of charge to mobile telephone

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 manufacturers, thereby enabling it to collect user data. In addition, Google provides many other
services, including video sharing, price comparison, cloud computing and online payment system
services, and these have provided additional consumer data, increasing the quality of, on the one
hand, its search engine services, and on the other hand, the value of data sold to advertisers for better-
targeted advertising. This makes Google attractive for both users and advertisers, and increases its
advertising revenues.
• Research on behavioural tendencies shows that there is a cognitive cost in switching platforms, in terms
of time, effort, energy and the concentration and sustained thought required; competition is therefore
not ‘one click away’. This further reinforces dominant platform market power and dominance.
How to Protect and Promote Competition in the Digital Economy
As explained above, digital platforms have changed the nature of markets and business models. This has
posed some challenges for competition law and policy as listed below:
Adapting the Antitrust Framework to Digital Challenges
Adjustments to the antitrust framework and tools need to be made to be able to address twenty-first
century challenges. The competition process is important in this regard, as follows: ‘One overarching
idea has unified these three concerns (distrust of power, concern for consumers and commitment to
opportunity for entrepreneurs): competition as process. The competition process is the preferred governor
of markets.’
Competition Law Enforcement
Digital platforms are characterised by their network effects and by being multisided, as well as by having
high switching costs, economies of scale and levels of control of data, all of which are pertinent in
the definition of the relevant market. Competition authorities need to employ additional criteria for the
definition of the relevant market in digital sectors.
Merger Analysis
An important method of addressing potential competition concerns that might arise from platform market
power is through merger analysis. However, at present in most jurisdictions, only mergers fulfilling a
turnover or asset threshold are subject to review. This does not take into account the value of data and
its control by merging parties. In the digital economy, data are important and confer power to businesses
that control data. Since in most jurisdictions, merger notifications are based on certain thresholds, usually
of turnover or assets, digital companies and start-ups may not be captured by the notification criteria as
they often do not reach the relevant turnover thresholds, despite having great value. Ideally, competition
authorities need to detect and eliminate the potential competition restraints from mergers at the start,
rather than trying to correct anticompetitive outcomes ex post, as the latter may be difficult once a firm
has monopolised the market.
Regulation
There are growing concerns about the abuse of market power by key platforms, the extent of their control
of data and the harm not only to consumers but also to society. Some of these platforms have become
dominant and almost indispensable to consumers, who have little choice, tend to use the same platforms
and show an unwillingness to switch. Such platforms are often compared to utilities in the sense that
users feel they cannot do without them and so have limited choice but to accept their terms of service.
There is a need for further reflection on whether competition law enforcement is the most appropriate
place to address digital platform issues. It may be more effective to regulate the platforms themselves to
ensure open and fair access for all businesses and provide for a level playing field rather than trying to
address competition problems after the fact under competition law.
The Australian Competition and Consumer Commission’s inquiry into digital platforms outlined their
concerns about the market power of key platforms such as Facebook and Google and their impact on
businesses in Australia. The commission considered that their strong market position ‘justifies a greater
level of regulatory oversight’ and proposed addressing key platform market power by actions such
as: preventing Google’s internet browser from being installed as a default browser on mobile devices,
computers and tablets; preventing Google’s search engine from being installed as a default search engine
on internet browsers; giving a new or existing regulatory authority the task of investigating, monitoring
and reporting on how large digital platforms rank and display advertisements and news content; and
strengthening merger laws.
Conclusion
Digitalisation will continue to penetrate all economic sectors and digital platforms are global and affect
the everyday lives of citizens worldwide. Monopolisation in the digital economy may not only harm
economies but also societies and democracies. There is a pressing need, therefore, for cooperation

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142 Global Strategy and Leadership

 between competition authorities at the bilateral, regional and international levels, to address the challenges
posed by the digital economy and to deal with any negative outcomes that may arise from digital platforms.
Source: Adapted from United Nations Conference on Trade and Development, 2019, ‘Competition issues in the digital
economy’, UNCTAD, 1 May, https://unctad.org/meetings/en/SessionalDocuments/ciclpd54_en.pdf.

QUESTION 2.27

Example 2.14 shows the impact of the digital economy on many external factors — social and
economic factors, laws and regulation, competition and even consumer behaviour. Therefore, when
conducting an external analysis, understanding the impact of technology and digital platforms on
the industry and organisation is vital. With this in mind, answer the following questions.
1. Examine how the digital economy is impacting on the accounting services industry in Australia.
2. Examine whether this is having an impact on competition in the industry.
3. Explain whether there are currently any laws or regulations relating to the digital economy that
effect the accounting services industry.
4. Explain whether more is needed to address the challenges faced by digital platforms in the
industry.
5. Explain what leaders and managers can do to minimise the impact or take advantage of the
digital economy within the Australian accounting services industry.

The key points covered in section 2.7 of this module, and the learning objective they align to, are
as follows.

KEY POINTS

2.3 Appraise how the roles of management and leadership drive the organisational strategy in
relation to the external environment.
• Beginning the strategic analysis with the external analysis forces leaders and managers to consider
issues outside their organisation, leading to a move critical analysis of how the organisation’s
strategy fits in the context of the external environment.
• Leaders need to establish a consistent and disciplined approach to external analysis that considers
all major relevant factors and uses sound reasoning.
• Leaders frame the external analysis by providing insight into the types of forces most relevant to
industry growth, profitability and competition.
• In the context of increasing availability of data and analytics, leaders and managers must establish
an approach to data management, including allocating resources, to ensure the organisation has
the data it needs to make management decisions.
• Interpretation of external analysis requires a balance between openness to potential opportunities
and threats and scepticism about unproven assumptions and interpretations.

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MODULE 2 Understanding the External Environment 143

REVIEW
Module 1 set the context for global strategy and leadership, and explained the strategy process. This
module has examined the first phase of this process: analysis of the external environment. Beginning with
external, rather than internal, environment analysis forces leaders and managers to look outside their day-
to-day concerns and look more critically at the ‘big picture’ of the organisation’s strategy, stakeholders,
capabilities and performance in context with the changing external environment.
The first part of external analysis is to define the scope of the external environment. This will include
the industry the organisation operates within, but that may be defined in various ways. The industry value
chain is a useful approach to understanding the industry. The way the industry is segmented and its stage
in the industry life cycle are also relevant to defining the industry.
The remote environment will also influence the organisation and must be considered. The remote
environment includes social, technological, economic, environmental, political, legal and ethical factors
that affect the organisation, but are not necessarily specific to its industry. A STEEPLE analysis (or a
variation such as PESTLE or PEST) helps form an understanding of the relevant factors in the remote
environment.
An industry environment analysis may be performed using Porter’s five forces model, which examines
the main influences on industry profitability: the threat of new entrants, the power of suppliers, the power
of buyers, the power of substitutes, and the intensity of competitive rivalry.
Understanding the market and customers is crucial to creating a value proposition. This must be
combined with an understanding of competition in the industry so that the organisation can decide how to
position itself in relation to competitors.
An analysis of the remote environment and the industry environment creates understanding of the factors
that drive growth and profitability in the industry, now and in the future. External analysis provides much
of the information leaders and managers need to begin to formulate a strategy. To ensure the analysis of the
external environment is of maximum value, leaders and managers should guide the scope of the analysis,
establish a culture and processes that value data and analytics, and be open and responsive to change.
The analysis of the external environment represents one part of strategic analysis. The other part is
analysis of the internal environment — the organisation’s strategic, operational, organisational and people
drivers along with the resources and capabilities the organisation possesses. module 3 will examine the
analysis of the internal environment and then combine the internal and external analyses to identify the
organisation’s strengths, weaknesses, opportunities and threats.

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